TALX CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-21465

TALX CORPORATION
(Exact name of registrant as specified in its charter)

MISSOURI 43-0988805
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1850 BORMAN COURT, ST. LOUIS, MO 63146
(Address of principal executive offices) (Zip Code)

(314) 214-7000
(Registrant's telephone number, Including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [ ] No

As of September 30, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $168,000,000. For
purpose of this calculation only, without determining whether the following are
affiliates of the registrant, the registrant has assumed that (i) its directors
and executive officers are affiliates and (ii) entities controlled by such
persons are affiliates.

As of May 16, 2003 there were 13,563,125 shares of the registrant's Common
Stock outstanding, net of treasury shares held by the Company.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's 2003 Annual
Meeting of Stockholders, which definitive proxy statement will be filed within
120 days of the end of the registrant's fiscal year, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements. In some cases, you can
identify forward-looking statements by terms such as "may," "will," "should,"
"could," "would," "expect," "plan," "anticipate," "believe," "estimate,"
"project," "predict," "potential" and similar expressions intended to identify
forward-looking statements. These statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and
uncertainties. These risks, uncertainties and other factors may cause our actual
results, performances or achievements to be materially different from those
expressed or implied by our forward-looking statements. Our forward-looking
statements in this Form 10-K include, but are not limited to, statements
relating to:

- our expectations regarding future financial results or performance
contained in the section "Results of Operations" contained in Item 7
(Management's Discussion and Analysis of Financial Condition and Results
of Operations);

- our business strategy;

- the market opportunity for our services and products, including
anticipated growth of our industry and expected demand for our services
and products;

- the anticipated benefits of our prior fiscal year acquisitions;

- our estimates regarding our capital requirements and needs for additional
financing; and

- any of our other plans, objectives, expectations and intentions contained
in this Form 10-K that are not historical facts.

Factors that may cause our actual results to differ materially from our
forward-looking statements include, among others, changes in general economic
and business conditions and the risks and other factors set forth in "Risk
Factors."

You should read this Form 10-K completely and with the understanding that
our actual results may be materially different from what we expect. We undertake
no obligation to update these forward-looking statements, even though our
situation may change in the future. We qualify all of our forward-looking
statements by these cautionary statements.

ITEM 1. BUSINESS

OVERVIEW

We are the leading provider of automated employment and income verification
and unemployment cost management services and a leader in providing outsourced
employee self-service applications. Our services enable mortgage lenders,
pre-employment screening companies, employers and other authorized users to
obtain employee human resources and payroll information. We also allow employees
to review and modify information in human resources and payroll management
information systems without requiring employer assistance. Further, we provide
unemployment insurance claims processing and unemployment tax planning and
management services to a broad range of employers.

Our services and software use interactive web, interactive voice response,
fax and other technologies and are designed to enhance service levels, improve
productivity and reduce costs by automating historically labor intensive,
paper-based processes and enabling users to perform self-service transactions.
We typically serve large organizations, including approximately two-thirds of
Fortune 500 companies and a number of federal, state and local government
agencies.

From the early 1980s until 1993, we offered our products and services
exclusively through licensed software specifically developed for each customer
and installed at the customer's site. We refer to this as our "customer premises
systems" business. In 1993, we began to deliver benefits enrollment and other
human

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resource services on an outsourced basis, allowing clients to utilize
applications and services over public or private networks without incurring the
capital expenditures and maintenance responsibilities of operating such a system
in-house. We also host many of our clients' databases at our facilities. In
1995, we introduced The Work Number, our leading service for employment and
income verification.

With the market's acceptance of our outsourced delivery method, in 1998, we
began to de-emphasize sales of customer premises systems, and in 2000
discontinued sales to new clients; however, we still have a base of clients for
whom we continue to provide maintenance and technical support services as well
as software and hardware upgrades.

See "Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Discontinued Operations" for information regarding
the divestitures of our database and document service businesses. See note 13 to
the consolidated financial statements included in this Form 10-K for financial
information about each of our segments for the last three fiscal years, which is
incorporated by reference herein.

As used in this Form 10-K, the terms "TALX," "we," "our," and "us" and
other similar terms refer to TALX Corporation, unless we specify otherwise.

TALX(R) is our registered trademark, and The Work Number For Everyone(R),
The Work Number(R), eChoice(R) and FasTime(R) are our registered service marks.
TALXWare is our trademark and UC eXpress, ePayroll, FasCast and W-2 eXpress are
our service marks. All other trade names, trademarks and product names in this
Form 10-K are the property of their respective owners.

We are incorporated under the laws of the state of Missouri. Our executive
offices are located at 1850 Borman Court, St. Louis, Missouri, 63146 and our
telephone number is (314) 214-7000.

Unless otherwise stated, all share and per share information in this Form
10-K reflects all of our stock dividends and our fiscal 2001 stock split.

AVAILABLE INFORMATION

Our Internet website address is http://www.talx.com. We have made copies of
the following reports available free of charge through our Internet website, as
soon as reasonably practicable after they have been filed with or furnished to
the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934: our annual report on Form 10-K; quarterly
reports on Form 10-Q; current reports on Form 8-K; and amendments to those
reports. Information on our website does not constitute part of this Report.

RESTATEMENT OF FINANCIAL STATEMENTS

In response to inquiries made by the Securities and Exchange Commission
during the course of its recent investigation, we reviewed, during our December
2002 quarter, the accounting treatment for two items in the year ended March 31,
2001. In December 2002 we restated certain of our previously issued financial
statements. The two items reviewed were the accounting for a patent technology
license agreement and the award of certain bonus payments to the executive
officers. The $1.6 million paid in connection with the patent technology license
entered into with Ronald A. Katz Technology Licensing, L.P. and A2D, L.P. in
March 2001 had been recorded as an intangible asset and was being amortized over
a 10-year period. We decided to expense the entire amount in the March 2001
quarter. Certain bonus payments to the executive officers, recommended by the
compensation committee and approved by the board of directors on May 15, 2001,
totaling approximately $158,000, had been reflected as an expense related to the
quarter ended June 30, 2001. We decided to record the entire expense in the
quarter ended March 31, 2001.

The effect of these restatements on the statement of earnings was to reduce
earnings for the year ended March 31, 2001 by $1.1 million, after income tax,
and to increase earnings over the following 10-year period by the same dollar
amount in the aggregate.

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Independent of the SEC investigation, we also considered recent guidance
from the SEC staff concerning the accounting for service transactions across
many industries, and restated certain revenues, as well as attendant costs, in
the Human Resources and Benefits Application Services and The Work Number
Services revenue lines. This guidance requires, for certain of our contracts,
revenues to be recognized on a straight-line basis from the time the service is
available for use by our clients through the end of the service period.
Previously, we had consistently recorded revenues as services were provided.

Additionally, during the course of the review into these matters, we
identified an inaccuracy in the method of computing the weighted average shares
outstanding used for the computation of diluted earnings per share.

See our Form 10-K/A for the period March 31, 2002 regarding the impact of
all restatements on our statements of operations and balance sheets. The
restatements had no impact on our total cash flows from operations, investing
activities or financing activities.

RECENT DEVELOPMENTS

On April 22, 2003 we sold substantially all of the assets of our human
resources and benefits application services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone.

The transaction is structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2 million and $6 million, with no minimum guaranteed amount. We
will record cash received under the asset purchase agreement first to reduce the
recorded value of net assets sold under the agreement and then to reflect gain
on the sale of the business. In connection with the sale, we will provide
Workscape, Inc., for agreed upon fees, with various transition services related
to the operation of the benefits enrollment business until December 31, 2005, or
until certain transferred client contracts have expired or been terminated.
Workscape, Inc. has hired all of the employees related to the benefits
enrollment business.

Near the end of our prior fiscal year, we acquired two businesses that
provide unemployment cost management services. These services include
unemployment insurance claims processing and unemployment tax management and
planning to a broad range of employers. These acquisitions expanded our core
human resource and electronic payroll services business to include unemployment
cost management services. We further believe the services provided by the
acquired businesses are complementary to our services and are cross-selling
those services to our existing client base. Since the date of the acquisitions,
we have commenced an integration strategy to consolidate the sales and customer
service delivery. This new structure was put into place during the first quarter
of fiscal 2004. Given the nature of this integration, we do not expect to
realize the full impact until the last half of fiscal 2004. Through transition
teams, we also reviewed best practices in various operational areas. We have
identified a single operating computer platform, and have established a goal of
completing our integration by the end of fiscal 2004.

UNEMPLOYMENT COST MANAGEMENT SERVICES BUSINESS OF GATES, MCDONALD & COMPANY

Pursuant to an asset purchase agreement, dated as of March 27, 2002, our
wholly-owned subsidiary, Garcia Acquisition Sub, Inc. ("Garcia"), purchased
certain of the assets and assumed certain of the liabilities of the unemployment
cost management services business (the "GM Unemployment Compensation Business")
of Gates, McDonald & Company, a subsidiary of Nationwide Mutual Insurance
Company. The GM Unemployment Compensation Business provides unemployment cost
management services to a broad range of employers.

The purchase price was $44.3 million, including transaction costs, and was
paid in cash, a portion of which was financed, as discussed below in Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources. The asset purchase agreement

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provides for Gates, McDonald & Company to indemnify us for certain existing
liabilities and obligations of the business, subject to certain limitations. An
escrow account, to be maintained by a bank pursuant to the terms of an escrow
agreement, is also available for a fifteen-month period following the date of
the asset purchase agreement to satisfy the indemnification obligations of
Gates, McDonald & Company under the asset purchase agreement, subject to certain
limitations contained in the asset purchase agreement. For such purposes, $4.0
million of the purchase price was paid into the escrow account. The
indemnification obligations of Gates, McDonald & Company with respect to tax and
certain employee benefit matters terminate upon the expiration of the applicable
statutes of limitation, authorization and title indemnification obligations
terminate after two years and all other indemnification obligations terminate 15
months from the date of the asset purchase agreement. The parties executed
several ancillary agreements in connection with the asset purchase agreement in
order to provide for the orderly transition of the GM Unemployment Compensation
Business and the employees of such business from Gates, McDonald & Company to
us. These ancillary documents included a transition services agreement, an
intellectual property license agreement, a lease services agreement and an
employee services agreement.

THE FRICK COMPANY

Additionally, pursuant to an acquisition agreement dated as of March 27,
2002, we purchased all of the 257,200 issued and outstanding shares of common
stock of James E. Frick, Inc., d/b/a The Frick Company, a Missouri corporation
("Frick"), from the James E. Frick Profit Sharing and Employee Stock Ownership
Plan (the "ESOP"), and options to acquire 190,500 shares of Frick's common stock
held by the four principal optionholders. Frick provides unemployment cost
control, unemployment claims handling, tax planning and related services and
employment information verification services to a broad range of clients. Frick
is now our wholly owned subsidiary.

The total purchase price for the Frick acquisition was $79.7 million,
including transaction costs, which includes amounts allocable to offer to
purchase remaining options to purchase 29,000 shares held by key employee
optionholders. The purchase price was based on a value of $162.60 per share of
common stock, less in the case of an option, the exercise price and withholding
and other applicable taxes, plus up to $16.78 from the escrow, as described
below. The purchase price was paid in cash, a portion of which was financed, as
discussed below in Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources.

Subsequent to the closing of the acquisition, we purchased from the key
employee optionholders the remaining options to purchase 29,000 shares of
Frick's common stock subject to the same terms and conditions as, and for a
price per share of underlying common stock equal to that received by, the four
principal optionholders under the acquisition agreement. The terms of the
acquisition agreement required the sellers to enter into an escrow agreement
with us. For such purpose, $8.0 million of the purchase price was deposited with
a bank to be disbursed in accordance with the escrow agreement. Except for
claims related to willful misrepresentation, our only remedy for indemnified
losses is against the escrow. This escrow account was fully liquidated and paid
to the sellers during May 2003.

SERVICES AND PRODUCTS

We provide services that enable both large and mid-size corporations, as
well as government agencies, to outsource the performance of business processes
that would otherwise be performed by their own human resources or payroll
departments. Our software uses interactive web, interactive voice response, fax
and other technologies to enable mortgage lenders, pre-employment screening
companies, employees and other authorized users to obtain employee human
resources and payroll information, and allows employees and their managers to
review and modify information in the human resources and payroll management
information systems on a self-service basis. Our services and products fall
within four general categories: The Work Number services, unemployment cost
management services, human resources and benefits application services and
customer premises systems, including related maintenance and support.

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THE WORK NUMBER SERVICES

Responding to inquiries to verify employment and income information,
printing and distributing pay stubs and annual W-2 forms, and updating employee
personnel records are burdensome and time-consuming tasks for employers and
divert resources from managing their businesses. The Work Number employment and
income verification service and other payroll-related business process
outsourcing services supported by The Work Number's database of employee records
are designed to help employers save time and effort and reduce expenses
associated with many of the administrative tasks required to support large
workforces.

The Work Number. Mortgage lenders, pre-employment screeners, social
service agencies and other information verifiers often request organizations to
verify employment and income information that has been provided by employees or
former employees. For example, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, leading purchasers of residential
mortgages in the United States, usually require independent verification of
employment and income data for the past two calendar years and a current payroll
period in connection with mortgages that they will purchase. In 1995, we
developed The Work Number as an outsourced service that enables employers to
reduce the costs and resources to respond to verification requests, while
empowering employees to control the release of personal information to third
parties.

When an employer receives a request for income and employment data
regarding an employee, the employer may direct the third-party verifier to our
web site or to a telephone number. Using the Internet or a toll-free telephone
number, verifiers who subscribe to our service can confirm the employee's
employment status and income for the past three years. Non-subscribing verifiers
can receive the same information through these methods using a credit card or
through a 1-900 telephone number. The Work Number is designed to ensure that
access to an employee's income data is available only to verifiers who have been
pre-authorized by the employee.

The Work Number provides the following benefits to employers, employees and
third-party verifiers:

We generate substantially all of The Work Number revenues from
transaction-based fees charged to mortgage lenders, pre-employment screeners,
credit issuers and other information verifiers for verification of income and
employment information. Revenue is recognized on these transaction-based fees in
the period that the transactions occur and are billed. We also generate revenues
from employer data conversion and ongoing maintenance fees, and record this
revenue on a monthly basis as billed. Lastly, we derive revenues from one-time
up-front setup fees. These fees are recognized as revenue on a straight-line
basis over the initial contract period, beginning with the date the client is
live on our system.

As of March 31, 2003, The Work Number database contained approximately 76
million employee records and had contracts to receive an additional 6 million
records. The 76 million records on-line represent approximately 25 million
current and 51 million former employees of approximately 1,000 large employers,
including federal, state and local government agencies. The Work Number database
is updated on an ongoing basis as employers electronically transmit data
directly to us each payroll period. Employers contract to provide this data for
specified periods, generally three years.

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W-2 eXpress. W-2 eXpress is a suite of services relating to the initial
distribution (either printed or electronic), reissue and correction of W-2 wage
and tax statement forms that we offer to existing clients of The Work Number and
other large employers. Using data provided by employers, we distribute original
W-2 forms (both electronically and in paper form) to employees and provide an
automated process to enable employees to request corrections to their W-2 forms
and obtain additional copies via the Internet or by telephone instead of
requiring direct interaction with the employer's payroll staff.

For employers, the primary benefits of our W-2 eXpress services include:

- simplifying the task of generating thousands of W-2 statements within a
narrow time period each year;

- reducing staff and other resources that must be allocated to the
production and distribution of W-2 statements and the reissuance of
corrected statements; and

- automating the process for collecting correction requests.

The majority of W-2 eXpress clients are billed based upon the number of
unique W-2s, generally pursuant to multi-year contracts. Revenue is recognized
on a straight-line basis from the time the service is available for use by TALX
clients through the end of the service period. Additionally, we have some
clients that are billed on a transactional basis. For these clients, we
recognize revenue on a monthly basis, as transactions occur.

ePayroll. ePayroll is another outsourcing service that we offer to
existing clients of The Work Number and other large employers. ePayroll is a
suite of payroll self-service applications that enable employees, via the
Internet or by telephone, to receive pay statement information, access current
and historical payroll information and review and change direct deposit account
information.

Employers that send us electronic transmissions of their employees' pay
stubs and direct deposit data can reduce the amount of staff required to process
routine employee payroll requests as well as reduce the cost to distribute paper
pay advices.

We charge ePayroll clients on a per-employee per-month basis, plus an
initial set-up fee, generally pursuant to multi-year contracts. Revenue for the
initial setup fees is recognized on a straight-line basis over the initial
contract period, beginning with the date the client is live on our system.
Per-employee per-month fees are recognized as revenue in the months billed.

FasTime. FasTime services are integrated time capture and reporting
solutions that work from any phone or the Internet. For large employers, FasTime
collects hours worked and exception time codes providing a user-friendly online
approval and reporting for managers. FasTime is customized according to a
company's business rules and processes. For the temporary staffing industry,
FasTime provides a comprehensive, paperless system for time, expenses and
availability, including manager approvals and the reporting and management tools
for branch offices.

FasTime clients are billed for initial set up fees, monthly maintenance
fees and per transaction fees, generally pursuant to multi-year contracts.
Revenue is recognized on a straight-line basis from the time the service is
available for use by our clients through the end of the service period for setup
and maintenance fees and as services are performed for transaction-based fees.

UNEMPLOYMENT COST MANAGEMENT

As a result of acquisitions we made during our 2002 fiscal year, we provide
unemployment cost management services under the name UC eXpress, through our
wholly-owned subsidiary TALX UCM Services, Inc. UC eXpress is a comprehensive
suite of services designed to reduce the cost of processing unemployment claims
by human resource departments and better manage the tax rate that employers are
assessed for unemployment taxes. UC eXpress utilizes document imaging and web
access to speed the processing of unemployment claims with the goal of
uncovering inaccuracies in claims that have been filed with state agencies by
separated employees. UC eXpress services are aimed at relieving human resource
departments of the administrative burden of managing unemployment claims.

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Following an employee separation, UC eXpress services respond to
unemployment claims on behalf of our clients. This includes reviewing employment
records to preserve the clients' rights as an employer. If an unemployment
hearing is required, UC eXpress services include client conferences with UC
eXpress hearing consultants/attorneys and, upon client request, attendance at
the hearing with the employer's representative. In addition, the UC eXpress
field-based account management team and hearing consultants bring state-
specific unemployment tax knowledge to the client.

UC eXpress also offers comprehensive employer tax services that encompass
five service areas:

- unemployment tax services

- employment tax research and recovery

- unemployment tax planning

- tax registrations

- employment tax consulting (withholding and unemployment)

Clients who choose UC eXpress for tax services collaborate with a UC
eXpress tax analyst to monitor the clients' unemployment tax accounts, verify
tax rates and contribution reports, and identify voluntary contribution
opportunities. Since UC eXpress offers a choice of employer tax services,
clients can take advantage of the services that are most effective in reducing
their employment tax costs.

We charge clients fees pursuant to multi-year contracts, generally billed
monthly or quarterly. Most contracts allow for additional charges if transaction
activity exceeds a certain threshold. Some unemployment tax planning contracts
call for contingent fees based upon actual tax savings realized. Revenues from
UC eXpress are recognized in the period that they are earned, evenly over the
life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met.

HUMAN RESOURCES AND BENEFITS APPLICATION SERVICES

As discussed above, on April 22, 2003 we sold substantially all of the
assets of our human resources and benefits application services business,
retaining contracts to administer other human resources services for three
clients, which we expect will either terminate or be assigned prior to the end
of fiscal 2004.

We formerly offered our clients outsourcing solutions designed to reduce
the resources and expenses associated with enrolling employees and administering
ongoing participation in employee benefits programs. Our services included
processing enrollments, producing personalized worksheets and confirmations, and
delivering completed enrollments to employers and insurance carriers. We
supported both open and ongoing enrollments year-round. Our applications enabled
employees to complete enrollments via the Internet, corporate portals and
corporate intranets. For those employees who preferred or needed to use the
telephone, options were available for processing enrollments via interactive
voice response.

In the past, we had offered customer premises-based software systems that
were tailored to meet the needs of a particular employer. Since 1993, we had
been providing customized benefits enrollment services using the application
service provider model. In 2000, we introduced eChoice, our advanced benefits
enrollment service combining the most popular features of our various customized
benefits enrollment offerings that we configured to meet each employer's
particular needs.

We marketed eChoice to organizations employing at least 5,000 people.
Through eChoice, employees could enroll in an employer's medical, dental and
other health and welfare benefits programs and make changes to their personal
information and benefits elections, all by means of the Internet or telephone.
eChoice enabled employers to remove many of the time-consuming aspects of
administering their benefits programs, while providing benefits managers with an
automated means of monitoring the enrollment process and performing certain plan
management functions. Additionally, eChoice allowed employees to make enrollment
decisions privately and assured that their elections would not be subject to
human transcription error.
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We generated revenues from eChoice by charging clients on a per-employee
basis, generally pursuant to multi-year contracts. We generated revenues from
our other human resources and benefits application services by charging clients
an initial set-up and development fee and monthly hosting and transactions fees,
generally pursuant to multi-year contracts. Revenue was primarily recognized on
a straight-line basis from the time the service was available for use by our
clients through the end of the service period.

CUSTOMER PREMISES SYSTEMS AND RELATED MAINTENANCE AND SUPPORT

From the early 1980s until 1993, we offered our products and services
exclusively through licensed software specifically developed for each customer,
and installed these systems at the customer's site. In 1993 we began to deliver
benefits enrollment services as an application services provider. In 1998 we
began to de-emphasize sales of customer premises systems, and in 2000 we
discontinued sales to new customers. We provide system enhancements to these
customers and customer support 7-days per week, 24-hours per day, through a
toll-free hotline, email and our website. We sold these systems under licenses
and generate additional revenues by providing ongoing maintenance and support.

SALES AND MARKETING

We employ a direct sales force in conjunction with strategic marketing
alliances. We use our direct sales force and strategic alliances to develop
relationships with large employers, typically having over 3,500 employees. In
addition, we use our strategic alliances to help us to identify potential
clients for The Work Number services among mid-sized employers, typically having
between 1,000 and 3,500 employees. In our unemployment cost management business,
our direct sales force sells to employers typically having over 3,500 employees.

DIRECT SALES FORCE

Our sales and marketing effort has representatives located in 40 U.S.
cities. Our sales and marketing effort relies on a team approach consisting of
approximately 136 professionals, including sales representatives, regional sales
managers, regional sales directors, regional sales vice presidents, product
managers, account managers, product consultants and marketing personnel. Our
business development representatives qualify companies as viable potential
clients and establish appointments for our regional sales managers. Our regional
sales managers are responsible for presenting our service offerings to
prospective clients and negotiating for the sale of our services. Our product
managers oversee product direction and provide sales assistance. Our account
managers service existing clients and product consultants provide technical
assistance to regional sales managers and prospective clients during the sales
process. Our marketing personnel support the sales force at all levels.

STRATEGIC MARKETING ALLIANCES

We have established alliances with leading providers of related human
resources outsourcing services to seek to build the database of records for The
Work Number and UC eXpress services relating to employees of mid-sized
employers. These alliances include:

- Hewitt Associates LLC: Hewitt Associates is a global management
consulting firm specializing in human resource services that has agreed
to make The Work Number available to its clients. For example, The Work
Number is directly accessible by employees of Hewitt's clients via a link
to our website. In exchange, we have agreed, among other things, to share
revenue with Hewitt resulting from its referrals.

- Ceridian Corporation: Ceridian is a national human resource outsourcing
company that has agreed to make The Work Number and unemployment cost
management services available to its clients in exchange for a share of
the revenue generated by such activities.

These and other strategic marketing alliances such as Towers Perrin, Mellon
HR Services, Workscape, Inc., PeopleSoft, Inc., Convergys Corporation and Fringe
Benefits Management Company are generally

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reflected by non-exclusive contractual arrangements that remain in effect for
specified periods. Recently, we entered into a business alliance with Money
Network to provide our clients with a payroll card that complements our
electronic payroll services. The success of these alliances will generally
depend on the interest and commitment of these companies to promote and
coordinate product development and marketing efforts with us, which is entirely
at their discretion. Some of these companies maintain similar relationships with
some of our competitors and compete directly with us in certain applications.

COMPETITION

We believe the principal competitive factors in our markets include:

- service and product quality, reliability and performance;

- functionality and ease of use;

- company reputation for integrity and confidentiality;

- company financial strength; and

- cost of the service or product.

Our primary competitors relating to The Work Number services and
unemployment cost management services are The Sheakley Group of Companies,
Employers Unity and Jon-Jay Associates, which are unemployment cost management
companies that also offer employment and income verification services. One of
our partners, Ceridian, offers services that are similar to a few of The Work
Number services. However, large employers are the primary market segment for The
Work Number services and we believe there is only limited overlap in the
marketplace with Ceridian's small to mid-size employer focus. Additionally, we
are aware of a number of employers who have established similar systems for
their internal use and believe additional competitors may emerge.

We believe that we compete favorably in the key competitive factors that
affect our markets for The Work Number services and our unemployment cost
management services. However, our markets are still evolving and we may not be
able to compete successfully against current or future competitors. Many of our
existing and potential competitors have significantly greater financial,
marketing, technical and other resources than we do. In addition, many of our
competitors have well-established relationships with our current and potential
clients and extensive knowledge of our markets. It is possible that new
competitors or alliances among competitors will emerge and rapidly acquire
market share. Moreover, our competitors may consolidate with each other, or with
other companies, giving them even greater capabilities with which to compete
against us.

TECHNOLOGY AND PRODUCT DEVELOPMENT

Each of our business lines is based on databases we construct and
applications we build to access and manipulate data. Our unemployment cost
management services are run on industry standard databases and applications.
Historically, our other services are run on industry standard databases and they
use a combination of Microsoft technologies and a proprietary integrated visual
development environment and software system known as TALXWare to build our
applications. TALXWare utilizes the Microsoft Windows NT and Windows 2000
operating systems and is designed to support the creation and management of
self-service solutions. We are currently in the process of migrating most of the
applications for The Work Number to the Microsoft.Net platform.

We also license and integrate complementary technologies into our products
including:

- speech recognition;

- text-to-speech;

- facsimile; and

- terminal emulation.
9

We license these technologies from third-party suppliers pursuant to
non-exclusive license or resale agreements or purchase under open market
arrangements and then integrate into our products. For example, we make
quarterly royalty payments under a license agreement for various interactive
voice response technologies in our application services businesses.

We have directed our development efforts toward enhancing and developing
new offerings for The Work Number services and UC eXpress services. The most
recent enhancements include extending the features and capabilities of The Work
Number database, through our W-2 eXpress and ePayroll paystub/direct deposit
services, the addition of new integrated and batch interfaces and the expansion
of our social services data. Additionally, we have focused our efforts on
enhancing and expanding our UC eXpress in-house claims processing system.

We incurred product development costs of $2.2 million, $2.0 million and
$4.8 million in fiscal 2001, 2002 and 2003. As of March 31, 2003, our total
product development staff consisted of 44 full-time employees. We believe that
significant investments in product development are required to remain
competitive.

PROPRIETARY RIGHTS

Our success and ability to compete is dependent in part upon our ability to
protect and maintain our proprietary rights to our intellectual property. We
regard our trademarks, and our other intellectual property, as having
significant value and being an important factor in the development and marketing
of our products.

We currently rely on a combination of trademark, trade secret and copyright
laws and restrictions on disclosure to establish and protect our intellectual
property. We have obtained a trademark registration for the name TALX and
service mark registrations for The Work Number For Everyone, The Work Number,
eChoice and FasTime with the United States Patent and Trademark Office. TALXWare
is our trademark, and UC eXpress, ePayroll, FasCast and W-2 eXpress are our
service marks.

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and the disclosure and use of other proprietary information.
However, these measures provide only limited protection of our intellectual
property rights. In addition, we may not have signed agreements containing
adequate protective provisions in every case, and the contractual provisions
that are in place may not provide us with adequate protection in all
circumstances.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain or use technology that we regard as
proprietary. We cannot assure you that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology or that our competitors will not independently develop techniques
that are similar or superior to our technology. Any failure to adequately
protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in loss of competitive advantage and decreased
revenues. In addition, litigation may be necessary to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights
of others. Litigation of this type could result in substantial costs and
diversion of resources and could significantly harm our business.

Interactive voice response technology is characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent
infringement. Third-parties have asserted in the past and, from time to time,
may assert in the future, patent, copyright, trademark and other intellectual
property rights to technologies that are important to our business. In one case,
we entered into a license agreement to use various interactive voice response
and computer telephony integration technologies under which we made an initial
payment and will pay future royalties. Further, we have not conducted a search
to determine whether the technology included in our products infringes or
misappropriates intellectual property held by other third-parties. In addition,
because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which could relate
to our products. Any claims asserting that our systems infringe or may infringe
proprietary rights of third-parties, if determined adversely to us, could
significantly harm our business.

10

CLIENTS

As of March 31, 2003, The Work Number database contained employee records
from approximately 1,000 clients, representing approximately 76 million present
and former employees. Additionally, as of that date, we had contracts with new
clients to provide 6 million records of present and former employees in backlog.
These clients typically employ over 5,000 employees. Our clientele includes
approximately two-thirds of the Fortune 500 companies and a number of federal,
state and local government agencies. Our clients operate in a wide variety of
industries, including financial services, telecommunications services, retail,
consumer products, health care, temporary services and government. As of March
31, 2003, our unemployment cost management business had over 6,500 clients of
various sizes and operated in a broad range of industries. No client accounted
for more than 10% of total revenues in any of the fiscal years 2001, 2002 or
2003.

EMPLOYEES

As of March 31, 2003, we employed approximately 1,160 full-time and 50
part-time employees.

We have never had a work stoppage, and no employees are represented by a
labor organization. We consider our employee relations to be good.

RISK FACTORS

You should carefully consider the following factors and other information
in this Form 10-K in evaluating our company:

WE MAY BE SUBJECT TO ADDITIONAL LITIGATION OR REGULATORY PROCEEDINGS AS A
RESULT OF OUR RECENT FINANCIAL STATEMENT RESTATEMENT.

In December 2002, we filed restated financial statements for each of the
quarters ended June 30, 2000 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As of the date hereof, we are not aware of any
litigation having been commenced against us related to this restatement.
However, such litigation could be commenced against us in the future and the
plaintiffs who have filed lawsuits against us previously could amend their
complaints to include claims related to this restatement, and if so, we could
not predict the outcome of any such litigation at this time. Additionally, the
lenders under our March 27, 2002 Loan Agreement, which is described more fully
below under Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources, could seek to exercise
remedies which may be available to them, such as acceleration of our loan, in
the event they determine that, as a result of the restatement or the SEC
investigation discussed herein, we have breached a covenant or representation
and warranty in the Loan Agreement. If an unfavorable result occurred in any
such action, our business and financial condition could be harmed.

As of the date hereof, the SEC is investigating our accounting for certain
items, including those which were the subject of the restatement. At this time,
we cannot predict whether or not any additional regulatory investigation related
to this restatement or any other matter will be commenced, or if it is, the
outcome of any such investigation. However, if any such investigation were to
result in a regulatory proceeding or action against us, our business and
financial condition could be harmed.

OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED
COMPANIES AND CAPITALIZE ON ANTICIPATED CROSS-SELLING OPPORTUNITIES.

On March 27, 2002, we acquired Frick and the GM Unemployment Compensation
Business, in each case with the expectation that the transactions will result in
certain benefits, including, without limitation, cost savings, operating
efficiencies, cross-selling opportunities, revenue enhancements and other
synergies. Achieving the benefits of these transactions will depend in part upon
the integration of the business of Frick and the GM Unemployment Compensation
Business together with each other and The Work Number line of products and
services in an efficient manner, and there can be no assurance that this will
occur. Our goal is to complete

11

the consolidation of the operations platform of Frick and the GM Unemployment
Compensation Business during fiscal 2004. The consolidation of operations will
continue to require substantial attention from management. The diversion of
management attention and any difficulties encountered in the integration
processes could have a material adverse effect on the revenues, levels of
expenses and operating results of the combined companies. There can be no
assurance that we complete the consolidation on a timely basis or that the
combined companies will realize all of the anticipated benefits.

OUR FUTURE GROWTH IS SUBSTANTIALLY DEPENDENT ON OUR ABILITY TO INCREASE THE
SIZE AND RANGE OF APPLICATIONS FOR THE WORK NUMBER DATABASE.

In order to successfully grow our business, we will have to make The Work
Number and related business process outsourcing services increasingly attractive
to a greater number of large organizations, their employees and third-party
information verifiers. To achieve this goal, we believe that we will need to
increase the number of employee records contained in The Work Number database,
the amount and type of information contained in those records and the number of
applications that make use of those records. Our strategy for increasing the
size of The Work Number database is based in part on strategic alliances with
several providers of human resources outsourcing services. Our success will
depend on the interest and commitment of these providers, which is entirely at
their discretion. Some of these companies compete with us in certain
applications. Our strategy is also based in part on strategic acquisitions of
businesses with databases of employee information, such as our prior fiscal year
acquisitions of Frick and the GM Unemployment Compensation Business. If we are
unable to attract and retain a sufficient number of employer clients, if we
cannot persuade them to include a greater amount of information in the employee
records they provide us, or if we fail to develop additional applications to use
this information, we may not achieve our growth objectives.

OUR REVENUES FROM THE WORK NUMBER MAY FLUCTUATE IN RESPONSE TO CHANGES IN THE
LEVEL OF RESIDENTIAL MORTGAGE ACTIVITY AND INTEREST RATES.

A significant portion of our revenues from The Work Number depends on
residential mortgage activity and interest rates. We charge a fee for each
request from mortgage lenders to verify employment and income information.
Therefore, a decrease in residential real estate mortgage activity would reduce
the number of transactions per record, which could adversely affect our
revenues. If residential mortgage activity declines, whether due to increases in
mortgage interest rates or otherwise, our revenues and profitability could be
harmed.

THE MARKET FOR THE WORK NUMBER DEPENDS IN PART ON THE REQUIREMENTS ESTABLISHED
BY PURCHASERS IN THE SECONDARY MORTGAGE MARKET, AND OUR REVENUES AND
PROFITABILITY WOULD BE SIGNIFICANTLY HARMED IF THESE REQUIREMENTS WERE RELAXED
OR ELIMINATED.

We believe that residential mortgage lenders are among the most active
users of The Work Number. They utilize our services to verify employment, income
and related information. The demand for this verification is driven in part by
the requirements of the Federal National Mortgage Association, which is also
known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, which is
also known as Freddie Mac, leading purchasers of residential mortgages in the
United States. These agencies currently require specific information, including
independent verification of employment and income data for the past two calendar
years and a current payroll period in connection with mortgages they purchase
having a loan-to-value in excess of 75%. Accordingly, most lenders seek this
information from mortgage applicants. If Fannie Mae or Freddie Mac were to
further reduce the requirement for employment and income data or eliminate the
requirement for independent verification thereof, our revenues and profitability
would be significantly harmed.

AS WE INITIATE LARGE-SCALE PROCESSING OF VERIFICATIONS, THERE IS AN INCREASED
RISK OF BREACH OF CONFIDENTIALITY, WHICH MAY RESULT IN DAMAGE CLAIMS AND LOSS
OF CUSTOMERS.

As we seek to increase the use of the Work Number database by verifiers
with frequent need of verification, we plan to use new methods of verification.
These verifiers may be large mortgage lenders, pre-employment screeners, social
services agencies, child support enforcement agencies, debt collectors or other
12

volume verifiers. These volume verifiers may obtain verifications in large
volume or "batch" transactions using different means and requiring less proof of
authorization than smaller verifiers. We expect that these volume verifiers will
enter into contracts by which they agree that they will not use the income
verification service unless they have been authorized by the employee to do so,
or have legal authority to obtain the information. We have the ability to
conduct regular audits of these volume verifiers to ensure compliance with
documentation requirements. However, there is a risk that the verifier may not
have the requisite authority, and that there may be claims for breach of
confidentiality against TALX, claims for damages by employees and employers and
resulting loss of employer relationships, which could significantly harm our
results of operations.

IF WE ARE UNABLE TO MAINTAIN THE ACCURACY AND CONFIDENTIALITY OF EMPLOYEE
INFORMATION IN THE WORK NUMBER AND OUR OTHER DATABASES, WE MAY FACE
SIGNIFICANT CLAIMS AND OUR REPUTATION COULD BE HARMED.

The Work Number services depends on the accuracy of highly confidential
employment and income history and other information which employers provide to
us and which we convert for use in The Work Number and our other services.
Although we have a number of protective measures in place, any inaccuracies in
such information -- whether in the recording of such information, the
unauthorized access to information, or otherwise -- or our inability to keep
such information confidential, may give rise to claims against us and adversely
affect market acceptance of The Work Number and our other services. Our
financial condition, results of operations and reputation may be significantly
harmed if any asserted claims were ultimately decided against us.

OUR FUTURE PERFORMANCE WILL BE DEPENDENT ON SUCCESSFUL INTEGRATION OF
ACQUISITIONS.

We expect a portion of our growth to come from business acquisitions which
we consummated in fiscal 2002 or which we may consummate in the future. Such
acquisitions involve certain operational, legal and financial risks. Operational
risks include the possibility that an acquisition does not ultimately provide
the benefits originally anticipated by our management, while we continue to
incur operating expenses to provide the services formerly provided by the
acquired company. Legal risks involve contract and regulatory issues. For
example, some employers may not consent to the transfer of ownership of their
contracts by which the unemployment cost management services are provided, and
some states' unemployment compensation commissions may require changes to powers
of attorney by which the employer authorizes processing of claims. In the event
of any loss of employer-customers or our inability to appear before state
unemployment commissions, our business and results of operations may be
materially adversely affected. Financial risks involve the incurrence of
indebtedness as a result of the acquisition and the consequent need to service
that indebtedness. In addition, the issuance of stock in connection with
acquisitions dilutes the voting power and may dilute the economic interests of
existing shareholders. In carrying out our acquisition strategy, we attempt to
minimize the risk of unexpected liabilities and contingencies associated with
acquired businesses through planning, investigation and negotiation, but there
can be no assurance that we will be successful in doing so, nor can there be any
assurance that we will be successful in identifying attractive acquisition
candidates or completing additional acquisitions on favorable terms.

IF THE FAIR CREDIT REPORTING ACT APPLIES TO THE WORK NUMBER SERVICES, OUR
BUSINESS AND REVENUES WILL BE HARMED.

The Fair Credit Reporting Act, which we refer to as the FCRA, may apply to
The Work Number services, which would have an adverse impact on us. The FCRA
applies to "consumer reporting agencies" that engage in the practice of
"assembling or evaluating" consumer credit information. We believe The Work
Number services do not cause us to be a consumer reporting agency and that the
FCRA does not apply to The Work Number services. Unlike consumer reporting
agencies, we receive all of the information in The Work Number database
regarding an employee from one source -- the employer. Further, when contracting
for The Work Number services, employers name us as their agent. The FCRA exempts
from its reach communications of a party solely related to experiences of the
consumer and the person making the report, such as an employer's report on its
experience with its employee. We believe that as an agent of employers, we are
not a

13

consumer reporting agency. Further, some rulings on the application of FCRA have
exempted businesses which, like The Work Number services, simply pass along
information gathered.

While we believe no controlling legal precedent exists, consumers or the
Federal Trade Commission, which enforces the FCRA, could take the position that
the FCRA does apply to us and seek to require us to comply with the FCRA and
seek penalties and damages. Among other provisions, the FCRA requires that a
consumer reporting agency determine that there be a "permissible purpose" before
disclosing a consumer report and furnish certain notices and information in
writing to consumers as consumer reports are used. If required, we would have
difficulty complying with these procedures; The Work Number services are
designed to operate via interactive voice response and the Internet, instead of
paper. Further, we might have to eliminate certain types of transactions,
resulting in loss of revenue. As a result, it is difficult to estimate the
ultimate impact on us in the event the FCRA were deemed to apply to The Work
Number services.

PRIVACY LEGISLATION OR INTERPRETATIONS OF EXISTING LAWS COULD RESTRICT OUR
BUSINESS.

Personal privacy has become a significant issue in the United States. Some
commentators, privacy advocates and government bodies have recommended
limitations on, or taken actions to limit, the use of personal information by
those collecting this information. For example, in 1999, Congress enacted the
Gramm-Leach-Bliley Act, which contains provisions protecting the privacy of
consumer non-public personal information collected by financial institutions.
Additionally, federal privacy regulations relating to the use and disclosure of
individually identifiable health information were recently issued by the
Department of Health and Human Services pursuant to the Health Insurance
Portability and Accountability Act of 1996. These privacy regulations could
impose additional costs and could limit our use and disclosure of such
information. Some states have also enacted consumer and health information
privacy protection laws.

If new statutes or regulations were adopted that restricted our business,
or existing statutes or regulations were deemed to apply to us, we may be
required to change our activities and revise or eliminate our services, which
could significantly harm our revenues and operations.

CHANGES IN ECONOMIC CONDITIONS OR CHANGES TO UNEMPLOYMENT COMPENSATION LAWS
COULD LIMIT UNEMPLOYMENT COMPENSATION CLAIMS, CAUSING EMPLOYERS TO QUESTION
THE VALUE OF UNEMPLOYMENT COMPENSATION MANAGEMENT AND LIMITING OPPORTUNITIES
FOR TAX PLANNING.

The difficult economic environment and consequent staff reductions by many
employers have resulted in an increase in unemployment compensation claims, and
employers have more readily recognized the value of our unemployment
compensation management and unemployment compensation tax planning services. As
economic conditions improve, and claims decrease, employers may question the
value of these services. If economic conditions do not improve, states with
significant budget challenges may take legislative or regulatory steps to reduce
unemployment benefits or to close tax-planning opportunities, which could reduce
the opportunities for service to employers. In such situations, our revenues
could be harmed.

INTERRUPTIONS TO OUR COMPUTER NETWORK OR TELEPHONE OPERATIONS COULD
SIGNIFICANTLY HARM OUR REVENUES AND INDUSTRY REPUTATION.

Significant portions of our operations depend on our ability to protect our
computer equipment and the information stored in our data processing centers
against damage from fire, power loss, telecommunications failures, unauthorized
intrusion and other events. We have data processing centers located in St.
Louis, Missouri; Columbus, Ohio and Plano, Texas which areas have historically
been vulnerable to natural disasters and other risks, such as floods,
earthquakes and tornadoes. We back-up software and related data files regularly
and store the back-up files off-site nearby. A portion of the data is also
replicated to an off-site storage area network for high availability. We cannot
assure you that these measures will eliminate the risk of extended interruption
of our operations. We also rely on local and long-distance telephone companies
to provide dial-up access, Internet and corporate intranet access to our
services. We have not established an alternative disaster recovery facility,
which would serve to protect us from losses of employee record information due
to damage to our data storage facilities. Any damage or failure that interrupts
our operations

14

or destroys some or all of our database of employee records could have a
material adverse effect on our revenues, profitability and industry reputation.

OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.

Our revenues, margins and operating results have fluctuated in the past,
and may continue to fluctuate in the future due to a number of factors.

For The Work Number, these factors include residential mortgage activity
and interest rate levels. Revenues generated from our W-2 eXpress service are
affected by seasonality, as revenues are primarily earned in our fourth fiscal
quarter. Other factors that can cause our operating results to fluctuate
include:

- new product introductions or announcements by us or our competitors;

- market acceptance of new services;

- the hiring and training of additional staff;

- the length of the sales cycle; and

- general economic conditions.

We cannot assure you that we will be able to sustain our level of total
revenue or our historical rate of revenue growth on a quarterly or annual basis.
It is likely that, in some future quarters, our operating results will fall
below our targets and the expectations of stock market analysts and investors.
In such event, the price of our common stock could decline significantly.

IF WE ARE UNABLE TO SUCCESSFULLY INTRODUCE NEW BUSINESS PROCESS OUTSOURCING
SERVICES AND ENHANCED FUNCTIONALITY TO KEEP PACE WITH RAPID TECHNOLOGICAL
CHANGES THAT CHARACTERIZE OUR MARKETS, OUR RESULTS OF OPERATIONS WOULD BE
SIGNIFICANTLY HARMED.

The business process outsourcing industry is characterized by rapidly
changing technology and our future success will depend upon our ability to keep
pace with technological developments. In particular, the market for self-service
applications through the Internet and corporate intranets using browser software
is rapidly evolving.

To remain competitive, we must continually change and improve our services
and products in response to changes in operating systems, application software,
computer and telephony hardware, communications, database and networking
systems, programming tools and computer language technology. Additionally, we
must also introduce new business process outsourcing services and add
functionality to existing services in response to changing market conditions and
client demand.

The development of new, technologically advanced services and products is a
complex and uncertain process requiring high levels of innovation and highly
skilled engineering and development personnel, as well as the accurate
anticipation of technology and market trends.

If we are unable, for technical or other reasons, to develop and market new
business process outsourcing services or enhancements to existing services in a
timely and cost-effective manner, or if new business process outsourcing
services do not achieve market acceptance, we could lose revenues and our
competitive position could suffer.

DISCONTINUANCE OF 900-NUMBER SERVICE COULD CAUSE LOSS OF REVENUE.

Many of our verifiers access The Work Number through the use of a
900-number telephone service. Our 900-number service provider, AT&T, has filed
with the Federal Communications Commission to discontinue providing 900-number
services as of December 31, 2003. We have been contacting 900-number users of
The Work number to advise them of the potential discontinuance of the 900-number
service, and to convert them to accessing The Work Number through an alternate
method of access, such as via the Internet or 800-

15

number. Since we began this campaign, we have seen a significant decrease in
900-number usage as we have successfully converted some of these users to one of
our other methods of access. However, there is a risk that some 900-number users
will not convert to other means of accessing The Work Number, and that we will
lose revenue opportunities as a result.

WE DEPEND ON THIRD-PARTY SOFTWARE AND HARDWARE, WHICH EXPOSES US TO DISRUPTION
IF THOSE PRODUCTS ARE NO LONGER SUPPORTED OR DEVELOP DEFECTS.

Our services and products involve integration with both operating systems
and products developed by others. If any third-party software or hardware, such
as Microsoft Windows server operating systems, or development tools, Oracle
database software, Sun Solaris, Informix database software, Intel Media
processing hardware or Sybase Power Builder development tools, become
unavailable for any reason, fail to integrate with our products or fail to be
supported by their respective vendors or to operate properly, we would have to
redesign our products. We cannot assure you that we could accomplish any
redesign in a cost-effective or timely manner. Further, if third-parties release
new versions of these systems or products before we develop products compatible
with such new releases, demand for our services and products might decline,
thereby harming our revenues and profitability.

We believe that if any supplier agreement expires or is canceled or
otherwise terminated, or if a third-party supplier refuses to sell to us, we
could locate any number of different suppliers. However, it would require a
significant amount of time to integrate the relevant technology from the new
supplier, which would result in a significant delay in our ability to offer the
particular enhancement. We could also experience difficulties integrating the
new supplier's technology with our products. We cannot assure you we could
accomplish any such integration in a cost-effective manner. Significant delays
in the offering of service or product enhancements due to integration of
technology from new suppliers could significantly harm our revenues and
profitability.

OUR SERVICES AND PRODUCTS MAY CONTAIN DEFECTS OR LACK ADEQUATE SECURITY WHICH
MAY CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT OUR ATTENTION FROM PRODUCT
DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF CUSTOMERS.

As a result of their complexity, business process outsourcing services and
hardware and software products may contain undetected errors or failures when
first introduced or as new versions are released. We cannot assure you that,
despite testing by us and our clients, errors will not occur in services and
systems after implementation. The occurrence of such errors could result in loss
or delay in market acceptance of our services or products, which could
significantly harm our revenues and our reputation.

Internet or other users could access without authorization or otherwise
disrupt our Internet and corporate intranet applications. Such unauthorized
access and other disruptions could jeopardize the security of information stored
in and transmitted through the computer systems of our clients, which could
result in significant liability to us, could cause the loss of existing clients
and could discourage potential new clients.

BECAUSE OF INTENSE COMPETITION FOR TRAINED PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS.

Our success depends in large part upon our ability to identify, hire,
retain and motivate highly-skilled employees. Competition for highly-skilled
employees in our industry is intense. In addition, employees may leave our
company and subsequently compete against us. Our failure to attract and retain
these qualified employees could significantly harm our ability to develop new
products and maintain customer relationships.

Moreover, companies in our industry whose employees accept positions with
competitors frequently claim that those competitors have engaged in unfair
hiring practices. We may be subject to such claims as we seek to retain or hire
qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims, regardless of
their merits. Such claims could also discourage potential employees who
currently work for our competitors from joining us.

16

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT
IN SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS.

Other parties have asserted in the past, and may assert in the future,
patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. For example, we have entered
into a license to use various interactive voice response and computer telephony
technologies that required us to make an initial payment and pay future
royalties. Further, we have not conducted a search to determine whether the
technology we have in our products infringes or misappropriates intellectual
property held by other third-parties. We cannot provide assurance that others
will not claim that we are infringing their intellectual property rights or that
we do not in fact infringe those intellectual property rights.

Any claims asserting that our products infringe or may infringe proprietary
rights of third-parties, if determined adversely to us, could significantly harm
our results of operations. Any claims, with or without merit, could:

- be time-consuming;

- result in costly litigation;

- divert the efforts of our technical and management personnel;

- require us to develop alternative technology, thereby resulting in delays
and the loss or deferral of revenues;

- require us to cease marketing business process outsourcing services
containing the infringing intellectual property;

- require us to pay substantial damage awards;

- damage our reputation; or

- require us to enter into royalty or licensing agreements which may not be
available on acceptable terms, if at all.

In the event a claim against us were successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our revenues, results
of operations and competitive position would be harmed.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
RESULTS OF OPERATIONS AND REPUTATION.

Our success and ability to compete is dependent in part on our ability to
protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trade secret, trademark and copyright laws to
establish and protect our intellectual property.

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code and the disclosure and use of our other proprietary information.
However, these measures provide only limited protection of our intellectual
property rights. In addition, we may not have signed agreements containing
adequate protective provisions in every case, and the contractual provisions
that are in place may not provide us with adequate protection in all
circumstances. Further, we have not included copyright notices on all of our
copyrightable intellectual property. Any infringement of our proprietary rights
could result in significant litigation costs, and any failure to adequately
protect our proprietary rights could result in our competitors offering similar
products, potentially resulting in the loss of one or more competitive
advantages and decreased revenues.

Despite our efforts to protect our proprietary rights, existing trade
secret, copyright, patent and trademark laws afford us only limited protection.
Others may attempt to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may
not be able to prevent misappropriation of our technologies or to deter others
from developing similar technologies. Further, monitoring the unauthorized use
of our products and other proprietary rights is difficult. Litigation may be
17

necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation of this type
could result in substantial costs and diversion of resources and could
significantly harm our results of operations and reputation.

WE FACE COMPETITION FROM A BROAD RANGE OF COMPANIES, INCLUDING LARGE AND
WELL-ESTABLISHED FIRMS.

The markets for our services and products are extremely competitive and
subject to rapid technological change.

We consider the primary competitors to The Work Number and the unemployment
cost management business to be The Sheakley Group of Companies, Employers Unity
and Jon-Jay Associates which are unemployment cost management providers offering
employment and income verification services. Additionally, we are aware of a
number of employers who have established similar systems for their internal use
and believe additional competitors may emerge.

Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could significantly harm our
results of operations. Additionally, we may be required to increase spending in
response to competition in order to pursue new market opportunities or to invest
in research and development efforts, and, as a result, our operating results in
the future may be adversely affected. We cannot assure you that we will be able
to compete successfully against current and future competitors or that
competitive pressures we face will not significantly harm our results of
operations.

PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MISSOURI LAW MAY
MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE
BENEFITS TO OUR SHAREHOLDERS.

A number of provisions of our articles of incorporation and bylaws and
Missouri law could make it difficult for a third party to acquire, or discourage
a third party from attempting to acquire, control of us. These provisions:

- provide for a classified board of directors;

- limit the right of shareholders to remove directors or change the size of
the board of directors;

- limit the right of shareholders to fill vacancies on the board of
directors;

- limit the right of shareholders to act by written consent and to call a
special meeting of shareholders or propose other actions;

- provide that the bylaws may be amended only by the majority vote of the
board of directors and shareholders will not be able to amend the bylaws
without first amending the articles of incorporation;

- require a higher percentage of shareholders than would otherwise be
required to amend, alter, change or repeal certain provisions of our
articles of incorporation and bylaws;

- authorize the issuance of preferred stock with any voting rights,
dividend rights, conversion privileges, redemption rights and liquidation
rights, and other rights, preferences, privileges, powers,
qualifications, limitations or restrictions as may be specified by our
board of directors, without shareholder approval; and

- restrict specified types of "business combinations" and "control share
acquisitions," as well as regulate some tender offers.

These provisions may:

- have the effect of delaying, deferring or preventing a change in our
control despite possible benefits to our shareholders;

- discourage bids at a premium over the market price of our common stock;
and

- harm the market price of our common stock and the voting and other rights
of our shareholders.

18

OUR STOCK PRICE IS HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.

The market price of our common stock has been highly volatile. The price
could continue to be subject to wide fluctuations due to factors including:

- actual or anticipated variations in our operating results;

- announcements of technological innovations or new services or contracts
by us or our competitors;

- developments with respect to patents, copyrights or proprietary rights;

- changes in financial estimates by securities analysts;

- conditions and trends in outsourcing of unemployment cost management,
human resources and payroll services; and

- general economic and market conditions.

The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies. Often these fluctuations have been unrelated or
disproportionate to the operating performances of those companies.

Broad market and industry factors may significantly affect the market price
of our common stock, regardless of our actual operating performance. Declines in
the market price of our common stock could also harm employee morale and
retention, our access to capital and other aspects of our business.

BECAUSE OUR SHARE PRICE IS VOLATILE, WE MAY BE THE TARGET OF SECURITIES
LITIGATION, WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND.

In the past, following periods of volatility in the market price of a
company's securities, shareholders have often instituted class action securities
litigation against those companies. We are currently defending against such
claims. See "Item 3 -- Legal Proceedings." Such litigation could result in
substantial costs and a diversion of management attention and resources, which
would significantly harm our profitability and reputation. These market
fluctuations, as well as general economic, political and market conditions such
as recessions or international currency fluctuations, may adversely affect the
market price of our common stock.

19

ITEM 2. PROPERTIES

We currently occupy approximately 272,000 square feet of office space in 33
buildings across the country. All of our facilities are leased and are utilized
primarily for general administrative, data processing and sales purposes. We
believe our facilities have been generally well maintained, are in good
operating condition and are adequate for our current requirements. Additionally,
we have approximately 40 employees, primarily sales-related, working out of
their homes. The following table includes descriptions of our significant
facilities.

ITEM 3. LEGAL PROCEEDINGS

We are a defendant from time to time in routine lawsuits incidental to our
business. Except to the extent described below, based on information currently
available, we believe that no current proceedings, individually or in the
aggregate, will have a material adverse effect upon us.

On December 26, 2001, a purported class action lawsuit was filed in the
United States District Court for the Eastern District of Missouri (Civil Action
No. 4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company,
against the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in our August 2001 secondary common stock offering
("Secondary Offering"). The case purportedly is brought on behalf of all persons
who purchased or otherwise acquired shares of our common stock between July 18,
2001 and October 1, 2001 ("Putative Class Period"), including as part of the
Secondary Offering. The complaint alleges, among other things, that certain
statements in the registration statement and prospectus for the Secondary
Offering, as well as other statements made by the Company and/or the Individual
Defendants during the Putative Class Period, were materially false and
misleading because they allegedly did not properly account for certain software
and inventory, did not reflect certain write-offs, and did not accurately
disclose certain business prospects. The complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder against the Company and the Individual Defendants,
violations of Section 11 of the Securities Act of 1933 against the Company, the
Individual Defendants and the underwriters, and violation of Section 15 of the
Securities Act of 1933 against Mr. Canfield.

Three additional purported class action lawsuits were filed in the same
court, against the same defendants and making substantially the same
allegations: on January 8, 2002 by Donald Metzger (Civil Action No.
4:02CV00031DJS); on January 9, 2002 by Anna Goodman (Civil Action No.
4:02CV00033DJS); and on January 30, 2002 by Al Hinton (Civil Action No.
4:02CV00168DJS) each of whom allegedly were shareholders of the Company during
the Putative Class Period. On February 15, 2002, these three lawsuits were
consolidated with and into the Brody lawsuit (Civil Action No. 4:01CV02014DJS)
for all purposes. On

20

or about April 14, 2002, a Consolidated Complaint was filed. In October 2002,
the case was transferred from the Honorable Donald J. Stohr, United States
District Judge, to the Honorable Henry E. Audrey, United States District Judge.

The Consolidated Complaint seeks, among other things, an award of
unspecified money damages, including interest, for all losses and injuries
allegedly suffered by the putative class members as a result of the defendants'
alleged conduct and unspecified equitable/injunctive relief as the Court deems
proper.

On May 20, 2002, we and the Individual Defendants filed a motion to dismiss
the lawsuits, and the underwriter defendants filed a separate motion to dismiss.
The plaintiffs filed their opposition to the motions to dismiss on June 19,
2002. The defendants' reply memoranda in support of the motions to dismiss were
filed on July 9, 2002. The District Court issued a Memorandum and Order on March
31, 2003 granting in part and denying in part the motion to dismiss. The Court's
Order dismissed the plaintiffs' claims under Section 10(b) and 20(a) of the
Exchange Act of 1934. The plaintiffs were granted leave to file an amended
Consolidated Complaint on or before May 30, 2003.

We believe the plaintiffs' claims are without merit and intend to defend
vigorously against them. However, due to the inherent uncertainties of
litigation, we cannot accurately predict the ultimate outcome of the litigation.
An unfavorable outcome could have a material adverse impact on our business,
financial condition and results of operations.

As previously disclosed, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. On November 12, 2002,
the staff of the Central Regional Office of the Commission sent us a "Wells
letter" indicating the staff's plans to recommend to the Commission that it
institute an enforcement action against us and two of our executive officers,
William Canfield and Craig Cohen, related to two matters, and requesting that we
and such executive officers submit responses to the letter. The Wells letter
states that the SEC staff will allege, among other things, that our financial
statements were misleading as a result of capitalizing instead of expensing $1.6
million related to a patent technology license agreement executed in March 2001
and expensing approximately $158,000 in bonus payments to executive officers in
the first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001.
Those items are among those that are the subject of our restatement discussed
herein. The remedies the Commission may consider include an injunction against
us and the individuals and, if appropriate, an officer and director bar and
disgorgement and civil money penalties against the individuals. The Company and
the individuals have filed separate written responses to the Wells letter
setting forth the reasons why the proposed enforcement action should not be
instituted by the Commission.

As described above, we have filed restated financial statements for each of
the quarters ended June 30, 2000 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, we could become
subject to additional litigation or regulatory proceedings or both. As of the
date hereof, we are not aware of any litigation having been commenced against us
related to this restatement. However, such litigation could be commenced against
us in the future and the plaintiffs who have filed lawsuits against us
previously could amend their complaints to include claims related to this
restatement, and if so, we could not predict the outcome of any such litigation
at this time. Additionally, the lenders under our March 27, 2002 Loan Agreement,
which is described more fully below under Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources, could seek to exercise remedies which may be available to them, such
as acceleration of our loan, in the event they determine that, as a result of
the restatement discussed above or the SEC investigation discussed below, we
have breached a covenant or representation and warranty in the Loan Agreement.
If an unfavorable result occurred in any such action, our business and financial
conditions could be harmed.

As of the date hereof, the SEC is investigating our accounting for certain
items, including those which were the subject of the restatement. We cannot
predict at this time whether or not any additional regulatory investigation
related to this restatement or any other matters will be commenced, or if it is,
the outcome of any such investigation. However, if any such investigation were
to result in a regulatory proceeding or action against us, our business and
financial condition could be harmed.
21

Additionally, we are required to indemnify each of the Individual
Defendants, as officers and/or directors of the Company, in connection with the
above matters, provided they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the Company. Stifel,
Nicolaus & Company and A.G. Edwards & Sons, Inc. have made demands on the
Company to indemnify them in connection with these matters.

Our directors and officers liability insurance carriers have received
notice of the consolidated litigation and SEC investigation.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of this type are expensive and will
require that we devote substantial resources and executive time to defend these
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Our common stock trades on the Nasdaq National Market under the symbol
"TALX." The following table sets forth the high and low sales prices of our
common stock (as adjusted for stock dividends and splits) as reported by the
Nasdaq National Market for each of the quarters since the beginning of fiscal
2002 through the end of fiscal 2003.

On May 16, 2003, the last reported sale price on the Nasdaq National Market
for our common stock was $13.48 per share. As of May 16, 2003, there were
approximately 135 holders of record of our common stock.

22

During fiscal 2001, we began paying dividends on our common stock on a
quarterly basis. The following table sets forth dividends declared per share of
common stock for the periods indicated:

Any future determination to pay dividends will be at the discretion of our
board of directors and will depend upon our earnings, capital requirements and
operating and financial condition and such other factors as the board may deem
relevant.

See Item 7 (Management's Discussion and Analysis of Results of Operations
and Financial Condition) regarding certain contractual restrictions on
dividends.

Equity Compensation Plan information is incorporated by reference herein to
"Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."

23

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

This section presents our selected historical financial data and certain
additional information. You should read carefully the financial statements
included in this Form 10-K, including the notes to the consolidated financial
statements, in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected data in this
section is not intended to replace the financial statements. As discussed
therein, on April 22, 2003, we sold substantially all of the assets of our human
resources and benefits application services business. See note 21 of the notes
to consolidated financial statements. During July 2001 we acquired Ti3, Inc. and
during March 2002, we acquired Frick and the GM Unemployment Compensation
Business.

We derived the financial data presented below for, and as of the end of,
each of the years in the five-year period ended March 31, 2003 from our
consolidated financial statements and the related notes which have been audited
by KPMG LLP, independent accountants. The financial information set forth below
reflects the classification of the database and document services businesses as
discontinued operations which is discussed in Note 14 to the consolidated
financial statements below.

- ---------------

(1) Basic and diluted earnings per share have been computed using the number of
shares of common stock and common stock options and warrants outstanding.
The weighted average number of shares was based on common stock outstanding
for basic earnings per share and common stock outstanding and common stock
options and warrants for diluted earnings per share in periods when such
common stock options and warrants are not antidilutive.

(2) Represents aggregate employment records included in The Work Number database
and employment records under contract that have not yet been converted to
the database.

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read this discussion together with the financial statements and
other financial information included in this Form 10-K for the year ended March
31, 2003.

Throughout the following Management's Discussion and Analysis, all amounts
reflect the restatements indicated in the Notes to Audited Consolidated
Financial Statements.

OVERVIEW

Our services and products consist of The Work Number services, unemployment
cost management services, human resources and benefits application services, the
sale of customer premises systems, and maintenance and support services related
to those systems. The technologies we use include both interactive web and
interactive voice response.

The Work Number services include:

- The Work Number, our leading employment and income verification service;

- W-2 eXpress, our suite of W-2 payroll services;

- ePayroll, our suite of payroll self-service applications; and

- FasTime, our automated timesheet collection and approval services.

We derive substantially all our revenues from The Work Number based on fees
charged to mortgage lenders, pre-employment screeners and other verifiers for
verification of employment history, including the past three years of income
history of participating employers' current and former employees. We derive
additional revenues from ongoing maintenance fees charged to employers and
one-time conversion fees from new employers. Our revenues from W-2 eXpress and
ePayroll represent fees charged to clients on a monthly fee basis which is based
upon the number of employees. We first introduced W-2 eXpress in fiscal 2000,
with no meaningful revenues generated until the fourth quarter of fiscal 2001.
Our first clients began using ePayroll in our second fiscal quarter of 2002. Our
revenues from FasTime include fees from establishment of the service and fees
based on the number of transactions. Costs of revenues related to The Work
Number services consist of telecommunications services, personnel, equipment and
capitalized software amortization.

As a result of our 2002 acquisitions, we provide unemployment cost
management services under the name UC eXpress. These services include
unemployment insurance claims processing and unemployment tax planning and
management to a broad range of employers. We charge clients fees on an annual
contractual basis, generally billed monthly or quarterly, pursuant to multi-year
contracts. Certain contracts allow for additional charges if transaction
activity exceeds a specified threshold. Certain unemployment tax planning
contracts call for contingent fees based upon actual tax savings realized. Costs
of revenues related to UC eXpress consist primarily of personnel and equipment.

As discussed below, we recently sold our benefits enrollment business,
which is the primary service included within our human resources and benefits
application services business. Our human resources and benefits application
services business consisted principally of benefits enrollment services that
offered employers and employees a broad range of automated features. In 2000, we
began offering eChoice, our advanced benefits enrollment service that provided
these features in a standardized package. We maintained a system on our premises
that contained a customer database and received incoming requests for access to
the information. Revenues from human resources and benefits application services
include fees derived from establishment of the service and fees based on the
number of employees or transactions. Costs of revenues related to our human
resources and benefits application services consist of personnel, equipment,
telecommunications services and capitalized software amortization.

Our customer premises systems business provides interactive web,
interactive voice response and computer telephony integration software and
services that enable an organization's users to access, input and update
information without human assistance. We recognize revenue from hardware sales
and software licenses upon shipment. Revenues from implementation services
relating to our customer premises systems
27

are recognized by the contract method of accounting using percentage of
completion for larger, more complex systems and the completed contract method
for smaller systems. With the market's acceptance of our application services
delivery method, in fiscal 1998 we began to de-emphasize sales of customer
premises systems and in fiscal 2000 discontinued sales to new clients. However,
we continue to provide maintenance and support services with respect to
installed customer premises systems. Revenues from maintenance and support are
recognized ratably over the term of the maintenance agreement. Costs of revenues
related to our customer premises systems consist of personnel, capitalized
software amortization and hardware costs of goods sold. Costs of revenues
related to maintenance and support consist primarily of personnel costs.

On April 22, 2003 we sold substantially all of the assets of our human
resources and benefits application services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone.

The transaction is structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2 million and $6 million, with no minimum guaranteed amount. We
will record cash received under the asset purchase agreement first to reduce the
recorded value of net assets sold under the agreement and then to reflect gain
on the sale of the business. In connection with the sale, we will provide
Workscape, Inc., for agreed upon fees, with various transition services related
to the operation of the benefits enrollment business until December 31, 2005, or
until certain transferred client contracts have expired or been terminated.
Workscape, Inc. has hired all of the employees related to the benefits
enrollment business.

RESTATEMENT OF FINANCIAL STATEMENTS

In response to inquiries made by the Securities and Exchange Commission
during the course of its recent investigation, we reviewed, during our December
2002 quarter, the accounting treatment for two items in the year ended March 31,
2001. In December 2002, we subsequently restated certain of our previously
issued financial statements. The two items reviewed were the accounting for a
patent technology license agreement and the award of certain bonus payments to
the executive officers. The $1.6 million paid in connection with the patent
technology license entered into with Ronald A. Katz Technology Licensing, L.P.
and A2D, L.P. in March 2001 had been recorded as an intangible asset and was
being amortized over a 10-year period. We decided to expense the entire amount
in the March 2001 quarter. Certain bonus payments to the executive officers,
recommended by the compensation committee and approved by the board of directors
on May 15, 2001, totaling approximately $158,000, had been reflected as an
expense related to the quarter ended June 30, 2001. We decided to record the
entire expense in the quarter ended March 31, 2001.

The effect of these restatements on the statement of earnings was to reduce
earnings for the year ended March 31, 2001 by $1.1 million, after income tax,
and to increase earnings over the following 10-year period by the same dollar
amount in the aggregate.

Independent of the SEC investigation, we also considered recent guidance
from the SEC staff concerning the accounting for service transactions across
many industries, and restated certain revenues, as well as attendant costs, in
the Human Resources and Benefits Application Services and The Work Number
Services revenue lines. For certain of our contracts, revenues are to be
recognized on a straight-line basis from the time the service is available for
use by our clients through the end of the service period. Previously, we had
consistently recorded revenues as services were provided.

Additionally, during the course of the review into these matters, we
identified and corrected an inaccuracy in the method of computing the weighted
average shares outstanding used for the computation of diluted earnings per
share.

28

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On a periodic basis, we evaluate our estimates, including those
related to revenue recognition, intangible assets, capitalized software and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.

We believe that the following critical accounting policies include our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition: Revenues from The Work Number are recognized in the
period that they are earned, from transaction fees charged to users for
verifications of employment history and income. Additionally, revenue for set up
fees, monthly maintenance and employer conversion fees are recognized on a
straight-line basis from the time the service is available to be used by our
clients through the end of the service period.

Revenues from our unemployment cost management services, called UC eXpress,
are recognized in the period that they are earned, evenly over the life of the
contract. Transaction fees are recorded as the services are provided. Revenue
which is contingent upon achieving certain performance criteria is recognized
when those criteria are met.

Human resources and benefits application services revenue is recognized on
a straight-line basis from the time the service is available to be used by our
clients through the end of the service period. Because of seasonal variations of
our service offerings, a greater number of clients have services available to
them from October through December than during any other period during the year.
As a result, revenues in our third fiscal quarter are substantially higher than
in the other three quarters of the year. In recent fiscal years, approximately
fifty percent of annual revenues in this revenue line have been recorded in the
third fiscal quarter.

We recognize hardware and software license revenue upon shipment based on
vendor-specific objective evidence. Revenues for customization services of
customer premises systems are recognized by the contract method of accounting
using percentage of completion for larger, more complex systems and the
completed contract method for smaller systems. Revenue from maintenance
contracts is deferred and recognized ratably over the maintenance period.

Deferred revenue represents the unearned portion of The Work Number setup
fees, as well as, Human Resources and Benefits Application Services, UC eXpress
and maintenance fees.

Commissions are paid based upon successful efforts and are deferred and
expensed over the related service period.

Intangible Asset Valuations: In connection with the acquisitions of Ti3,
Inc.; the unemployment cost management services business of Gates, McDonald &
Company, a subsidiary of Nationwide Mutual Insurance Company; and James E.
Frick, Inc., d/b/a The Frick Company, TALX acquired certain identifiable
intangible assets. These assets were recorded in accordance with the Financial
Accounting Standards Board SFAS No. 141, "Business Combinations".

Effective April 1, 2002, we have adopted the Financial Accounting Standards
Board SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. Under the provisions of SFAS No.
142, any impairment loss identified upon adoption of this standard will be
recognized as a cumulative effect of a change in accounting principle. Goodwill
and intangible assets determined to have an indefinite useful life that are
29

acquired in purchase business combinations will not be amortized, but instead
tested for impairment on an annual basis. Through the use of an independent
business appraiser, we reviewed our goodwill and intangible assets as of
December 31, 2002 and determined that no impairment existed.

Capitalized Software: Software development costs are expensed as incurred
until technological feasibility is achieved, after which they are capitalized on
a product-by-product basis. Amortization of capitalized software development
costs is computed using the straight-line method over the remaining estimated
economic life of the product, generally three years. Amortization of capitalized
software development costs starts when the product is available for general
release to clients. All capitalized software assets are reviewed as of each
balance sheet date for impairment. Upon determination of any impairment, the
asset is written-down to the appropriate value in the period that the impairment
is determined.

Income Taxes: We record income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences. If management
were to determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged against earnings in the period such determination was made.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States of America, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. See
our consolidated financial statements and notes thereto contained in this Annual
Report on Form 10-K which contains accounting policies and other disclosures
required by accounting principles generally accepted in the United States of
America.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"),
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." Among other provisions, SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
Accordingly, gains or losses from extinguishment of debt shall not be reported
as extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of APB No. 30. Gains or losses from extinguishment of
debt that do not meet the criteria of APB No. 30 should be reclassified to
income from continuing operations in all prior periods presented. SFAS No. 145
is effective for fiscal years beginning after May 15, 2002. We will adopt SFAS
No. 145 beginning in our fiscal year 2003. We do not expect the adoption of SFAS
No. 145 to have a material impact on our financial position or results of
operations.

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. This statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Previous guidance, provided under EITF No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including certain costs incurred in a restructuring),"
required an exit cost liability be recognized at the date of an entity's
commitment to an exit plan. The provisions of this statement are effective for
exit or disposal activities that are initiated by a company after

30

December 31, 2002. We will adopt SFAS No. 146 in the next fiscal year in
conjunction with the disposal of our benefits enrollment business. We do not
expect this adoption to have a material impact on our financial position or
results of operations.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment to FASB Statement No.
123, Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of Statement 123 to require more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. The transition guidance and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We have adopted the disclosure requirements of SFAS No. 148, with no
impact to our financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
FIN No. 45 will affect leasing transactions involving residual guarantees,
vendor and manufacturer guarantees, and tax and environmental indemnities. All
such guarantees will need to be disclosed in the notes to the financial
statements starting with the period ending after December 15, 2002. For
guarantees issued after December 31, 2002, the fair value of the obligation must
be reported on the balance sheet. Existing guarantees will be grandfathered and
will not be recognized on the balance sheet. We do not expect the adoption of
FIN No. 45 to have a material impact on our financial position or results of
operations.

In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities." FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Disclosure requirements apply
to any financial statements issued after January 31, 2003. We have considered
the provisions of FIN No. 46 and believe it will not be necessary to include in
our financial statements any assets, liabilities, or activities of the entities
holding our corporate headquarters leases. We do not expect the adoption of FIN
No. 46 to have a material impact on our financial position or results of
operations.

31

RESULTS OF OPERATIONS

The following tables set forth (1) revenues and gross margin, (2) the gross
margin percentage by revenue category, and (3) certain items from our statement
of operations as a percentage of revenues for the periods indicated:

FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002

Revenues. Total revenues increased 182.2% to $125.7 million in fiscal 2003
from $44.6 million in fiscal 2002.

Revenues from The Work Number services increased 32.2% to $35.9 million in
fiscal 2003 from $27.2 million in fiscal 2002, due to an increase in the number
of employment records in the database and related transaction volume, new
clients gained from continued marketing to employers and verifiers and the
inclusion of revenues from our acquisition of Ti3 beginning in the second
quarter of fiscal 2002.

Revenues from unemployment cost management services increased to $74.6
million in fiscal 2003 from $848,000 in fiscal 2002. Fiscal 2002 included only
four days of revenue from our March 27, 2002 acquisitions of The Frick Company
and the GM Unemployment Compensation Business, while fiscal 2003 includes a full
year.

Revenues from human resources and benefits application services increased
4.4% to $10.2 million in fiscal 2003 from $9.8 million in fiscal 2002, due to
the addition of client services going live, offset by client attrition not being
replaced by new sales. This softening of new sales is primarily due to the poor
economic conditions which began affecting our sales performance in the second
quarter of fiscal 2002.

Revenues from customer premises systems decreased 53.9% to $1.3 million in
fiscal 2003 from $2.9 million in fiscal 2002. This decrease is due to a shift in
our focus away from selling in-house systems.

Revenues from maintenance and support related to the customer premises
systems decreased 6.5% to $3.6 million in fiscal 2003 from $3.9 million in
fiscal 2002, reflecting the support provided to a shrinking installed base as we
shifted our strategy toward providing similar solutions through application
services.

We anticipate revenues from customer premises systems and maintenance and
support will continue to decrease from current levels as we have discontinued
sales to new clients and continue to emphasize The Work Number services and
unemployment cost management services.

Gross Margin. Gross margin increased 187.5% to $66.9 million in fiscal
2003 from $23.3 million in fiscal 2002. As a percentage of total revenues, gross
margin increased to 53.2% in fiscal 2003 from 52.2% in fiscal 2002.

33

The Work Number services gross margin increased 32.4% to $23.6 million, or
65.8% of corresponding revenue, in fiscal 2003 from $17.9 million, or 65.7% of
corresponding revenue, in fiscal 2002. The increase in gross margin and gross
margin percentage was due primarily to revenue increases and improved leveraging
of our operational infrastructure, partially offset by an increase in personnel
and infrastructure costs to accommodate possible future electronic payroll
services clients.

Unemployment cost management services gross margin increased to $36.3
million, or 48.6% of corresponding revenue, in fiscal 2003 from $398,000, or
46.9% of corresponding revenue, in fiscal 2002. The increase in gross margin is
due to the inclusion of a full year in fiscal 2003 versus four days in fiscal
2002. The increase in gross margin percentage is due to improved leveraging of
our operational infrastructure, primarily resulting from our efforts to
consolidate the operations of the acquired businesses. We expect to realize
improvements in the gross margin percentage throughout the next fiscal year as
we continue to consolidate the operations of the acquired businesses.

Human resources and benefits application services gross margin increased
66.2% to $3.7 million, or 36.3% of corresponding revenue, in fiscal 2003 from
$2.2 million, or 22.8% of corresponding revenue, in fiscal 2002. This increase
in gross margin and gross margin percentage is principally due to improved
leveraging of personnel costs within our delivery organization. Because of the
seasonal variations in our service offerings, gross margins in this revenue line
are lower in the first, second and fourth fiscal quarters and are substantially
higher in our third fiscal quarter each year. This is because fixed
infrastructure and personnel costs are incurred relatively evenly throughout the
year, while revenues are seasonally higher in the third fiscal quarter due to
proportionally increased benefits enrollment activity.

Customer premises systems gross margin increased 50.0% to $327,000, or
24.7% of corresponding revenue, in fiscal 2003 from $218,000, or 7.6% of
corresponding revenue, in fiscal 2002. The increase in gross margin and gross
margin percentage is due to a lower level of fixed costs required as we have
discontinued new sales within this business unit, including the elimination of
amortization of capitalized software that remained during the first quarter of
fiscal 2002.

Maintenance and support gross margin remained consistent at $2.9 million in
fiscal 2003 and 2002. Gross margin as a percentage of corresponding revenue
increased to 79.8% in fiscal 2003, from 73.6% in fiscal 2002. The increase in
gross margin percentage is due to improved leveraging of personnel costs, offset
by lower revenues caused by a shrinking client base.

Selling and Marketing Expenses. Selling and marketing expenses increased
131.2% to $19.7 million in fiscal 2003 from $8.5 million in fiscal 2002. This
increase in expense is primarily due to the addition of our recently acquired
unemployment cost management services businesses. As a percentage of revenues,
such expenses decreased to 15.7% in fiscal 2003 from 19.1% in fiscal 2002. The
decrease in percentage of revenues is due to the greater rate of increase in our
revenues as compared to personnel and related costs.

General and Administrative Expenses. General and administrative expenses
increased 237.8% to $25.2 million in fiscal 2003 from $7.5 million in fiscal
2002. This increase is primarily due to the addition of our recently acquired
unemployment cost management services businesses. Additionally, in the last half
of fiscal 2003 we incurred approximately $750,000 in incremental legal and
accounting fees related to our ongoing SEC investigation and related financial
statement restatements. This amount is net of reimbursements received under our
insurance policy. As a percentage of revenues, such expenses increased to 20.0%
in fiscal 2003 from 16.7% in fiscal 2002. This increase is due primarily to the
newly acquired unemployment cost management services businesses historically
having higher general and administrative expenses as a percentage of revenue
compared to our traditional businesses. We expect to see this percentage improve
in future quarters as we continue to consolidate the cost structure of the
acquired businesses.

Restructuring and Other Charge. During the quarter ended September 30,
2001, we reorganized our sales and delivery operations and refocused our product
lines related to our human resources and benefit applications and customer
premises systems businesses. In conjunction with the reorganization, we reduced
our workforce by approximately 17%, closed certain regional sales offices and
wrote-down hardware inventory and capitalized software. As a result of these
actions, we incurred restructuring charges of $1.9 million

34

associated with the write-off of capitalized software, $349,000 related to
employee severance costs and $337,000 related to office closing costs. These
items are reflected in the line item "restructuring charge" on the statement of
earnings and $240,000 and $139,000 is reflected in accrued expenses on the
balance sheet as of March 31, 2002 and 2003, respectively. Additionally, we
incurred a charge of $307,000 related to the write-down of certain hardware
inventory items. This charge is reflected as a separate component of cost of
goods sold on the statement of earnings for the year ended March 31, 2002.

Other Income (Expense), Net. Other income (expense), net decreased to $1.4
million of other expense in fiscal 2003 from $1.6 million of other income in
fiscal 2002, due to a shift from a net investing position to a net borrowing
position. This is due to borrowings and the reduction of cash related to our
acquisitions of the unemployment cost management services businesses.

Income Tax Expense. Our effective income tax rate was 38.3% in fiscal 2003
and 36.9% in fiscal 2002. The increase is primarily due to the inclusion of
tax-exempt interest earned on state and federal tax free municipal securities
during fiscal 2002, and to a lesser extent, a higher effective state income tax
rate in fiscal 2003 compared to fiscal 2002.

FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001

Revenues. Total revenues increased 14.2% to $44.6 million in fiscal 2002
from $39.0 million in fiscal 2001.

Revenues from The Work Number services increased 42.0% to $27.2 million in
fiscal 2002 from $19.1 million in fiscal 2001, due to an increase in the number
of employment records in the database and related transaction volume, new
clients gained from continued marketing to employers and verifiers, the
inclusion of revenues from our acquisition of Ti3 in the second quarter of
fiscal 2002 and, to a lesser extent, an increase in pricing during the year.

Revenues from unemployment cost management services for fiscal 2002
includes four days of revenue from our March 27, 2002 acquisitions of The Frick
Company and the GM Unemployment Compensation Business. Revenues from human
resources and benefits application services increased 13.9% to $9.8 million in
fiscal 2002 from $8.6 million in fiscal 2001, due to the addition of client
services going live, offset by client attrition. This growth was less than
planned, due the poor economic conditions experienced during the second and
third quarters of fiscal 2002.

Revenues from customer premises systems decreased 58.3% to $2.9 million in
fiscal 2002 from $6.9 million in fiscal 2001. This decrease is due to a shift in
our focus away from selling in-house systems to our human resources and benefits
application services.

Revenues from maintenance and support related to the customer premises
systems decreased 11.9% to $3.9 million in fiscal 2002 from $4.4 million in
fiscal 2001, reflecting the support provided to a shrinking installed base as we
shifted our strategy toward providing similar solutions through application
services.

Gross Margin. Gross margin increased 23.7% to $23.3 million in fiscal 2002
from $18.8 million in fiscal 2001. As a percentage of total revenues, gross
margin increased to 52.2% in fiscal 2002 from 48.2% in fiscal 2001.

The Work Number services gross margin increased 37.7% to $17.9 million in
fiscal 2002 from $13.0 million in fiscal 2001, but as a percentage of
corresponding revenue, decreased to 65.7% in fiscal 2002 from 67.7% in fiscal
2001. The increase in gross margin is due primarily to revenue increases. The
gross margin percentage decreased slightly due to the addition of Ti3, which has
a slightly lower gross margin than our traditional The Work Number services.
Also, costs related to personnel and infrastructure increased slightly to
accommodate possible future electronic payroll services clients.

Human resources and benefits application services gross margin increased
38.4% to $2.2 million, or 22.8% of corresponding revenue, in fiscal 2002 from
$1.6 million, or 18.8% of corresponding revenue, in fiscal 2001. This increase
in gross margin and gross margin percentage is principally due to a higher level
of revenues and better leveraging of fixed infrastructure costs as services were
available to a greater number of clients.
35

Customer premises systems gross margin decreased 80.0% to $218,000, or 7.6%
of corresponding revenue, in fiscal 2002 from $1.1 million, or 15.9% of
corresponding revenue, in fiscal 2001, as revenues declined. The decrease in
gross margin percentage is due to certain fixed costs that remained as we
shifted our business focus to The Work Number services and human resources and
benefits application services.

Maintenance and support gross margin decreased 8.8% to $2.9 million, or
73.6% of corresponding revenue, in fiscal 2002, from $3.1 million, or 71.1% of
corresponding revenue, in fiscal 2001 due to lower revenues caused by a
shrinking client base. The gross margin percentage increased due to a lower
level of third-party hardware support costs and improved leveraging of personnel
costs.

Selling and Marketing Expenses. Selling and marketing expenses increased
1.7% to $8.5 million in fiscal 2002 from $8.4 million in fiscal 2001. As a
percentage of revenues, such expenses decreased to 19.1% in fiscal 2002 from
21.5% in fiscal 2001. The decrease in percentage of revenues is due to the
greater rate of increase in our revenues as compared to personnel and related
costs. Additionally, we anticipate these costs will generally decrease as a
percentage of revenues as our revenue mix shifts more to The Work Number
Services which have lower sales maintenance costs.

General and Administrative Expenses. General and administrative expenses
increased 29.3% to $7.5 million in fiscal 2002 from $5.8 million in fiscal 2001.
The increase in such expenses reflected the increased infrastructure costs of a
growing business and workforce, including the inclusion of costs related to our
acquisitions during fiscal 2002. As a percentage of revenues, such expenses
increased to 16.7% in fiscal 2002 from 14.8% in fiscal 2001. The increase in
general and administrative expenses as a percentage of revenues is due to
revenue growth rates, particularly in human resources and benefits application
services, that were lower than anticipated.

Restructuring and Other Charge. During the second quarter of fiscal 2002,
we reorganized our sales and delivery operations and refocused our product lines
related to our human resources and benefit applications and customer premises
systems businesses. In conjunction with the reorganization, we reduced our
workforce by approximately 17%, closed certain regional sales offices and
wrote-down hardware inventory and capitalized software. As a result of these
actions, we incurred restructuring charges of $1.9 million associated with the
write-off of capitalized software, $349,000 related to employee severance costs
and $337,000 related to office closing costs. These items are reflected in the
line item "restructuring charge" on the statement of earnings and $240,000 is
reflected in accrued expenses on the balance sheet. Additionally, we incurred a
charge of $307,000 related to the write-down of certain hardware inventory
items. This charge is reflected as a separate component of cost of goods sold on
the statement of earnings.

Other Income, Net. Other income increased to $1.6 million in fiscal 2002
from $562,000 in fiscal 2001, due to interest income earned on a higher level of
invested funds. Invested funds increased due to the receipt of the proceeds from
our secondary common stock offering during the second quarter of fiscal 2002 and
cash flow from operations.

Income Tax Expense. Our effective income tax rate was 36.9% in fiscal 2002
and 40.9% in fiscal 2001. The decrease is due to tax-exempt interest earned on
state and federal tax free municipal securities during the last eight months of
fiscal 2002, and to a lesser extent, a lower effective state income tax rate. As
we continue to move our business to a business process outsourcing services
model, we have reduced the amount of taxes paid on hardware and software sales
in states with higher income tax rates.

DISCONTINUED OPERATIONS

In August 1996, we determined to divest our database and document services
businesses and, accordingly, reflected the results of operations of such
businesses as discontinued operations. A provision of $350,000 was made as of
June 30, 1996, to reflect the anticipated loss from operations until the time of
disposal. On January 31, 1997, we sold substantially all of the assets of the
document services business to Sterling Direct, Inc., the largest customer of the
division. The sales price, after giving effect to the post-closing adjustments,
was $1,241,000. The net assets sold totaled approximately $566,000. As of March
31, 1997 and 1998, we provided additional provisions for loss, net of tax, in
the amount of $550,000 and $374,000, respectively.

36

Effective March 31, 2000, we sold substantially all of the assets, net of
liabilities, of the database services business to WPZ Holdings, Inc., the parent
company of one of the division's largest customers. The sales price was
$1,273,000. We realized pre-tax and after-tax gains of $187,000 and $117,000,
respectively.

During the quarter ended September 30, 2000, we concluded all
transition-related activity for the database services business. Completing this
transition ahead of schedule resulted in a savings of $61,000 of the transition
reserve. Therefore, we realized pre-tax and after-tax gains of $61,000 and
$37,000, respectively.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth (1) specified unaudited statement of
operations data for each of the four quarters in fiscal 2002 and 2003, (2) the
gross margin percentage for each of our revenue categories, and (3) operating
data expressed as a percentage of our total revenues. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements contained herein and include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of such information when read in conjunction with our financial statements and
related notes included elsewhere in this Form 10-K. We believe that
quarter-to-quarter comparisons of our financial results should not necessarily
be relied upon as an indication of future performance.

Our revenues, margins and operating results have fluctuated in the past,
and are likely to continue to fluctuate in the future, on an annual and
quarterly basis, as a result of a number of factors, most of which are outside
of our control, as discussed in "Risk Factors -- Our quarterly and annual
operating results may fluctuate significantly, which could cause our stock price
to decline significantly."

SEASONALITY

Because of the seasonal variations of our human resources and benefits
applications services offerings, a greater number of clients have had services
available to them from October through December than during any other period
during the year. As a result, revenues in our third fiscal quarter have been
substantially higher than in the other three quarters of the year. In fiscal
2002 and 2003, over fifty percent of annual revenues in this revenue line have
been recorded in the third fiscal quarter. Given the disposal of this business
unit as of April 22, 2003, our future statements of earnings should no longer be
impacted by this seasonality.

Revenues generated from our W-2 eXpress service are particularly affected
by seasonality and are principally earned in our fourth fiscal quarter.

Revenues generated from our unemployment cost management services, which we
acquired in late March 2002, are generally higher in the third and fourth fiscal
quarters as certain client contracts allow us to bill additional fees based upon
actual annual claims volumes. Additionally, our tax planning business has an
inherent seasonality based upon the general nature of tax services.

38

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have financed our operations through cash flows from
operations.

On August 8, 2001 we completed a secondary stock offering of 2,950,000
shares of our common stock, including 200,000 shares of a selling shareholder,
resulting in gross proceeds to the Company of $83.1 million. Additionally, we
incurred $644,000 of costs related to the transaction which were offset against
the proceeds. The share amounts discussed above do not include the effect of the
10% stock dividend declared on September 6, 2001.

Our working capital was $3.0 million at March 31, 2002 and $1.5 million at
March 31, 2003. Total working capital decreased in fiscal 2003 due principally
to payments made related to our March 27, 2002 acquisitions and increases in
deferred revenue and the current portion of long-term debt. At March 31, 2003,
$7.5 million of current liabilities represent deferred revenue instead of
payment obligations. As a result, based on cash and cash equivalents on hand
together with anticipated cash flows from operations, we believe we have
sufficient liquidity to pay our obligations as they become due, for at least the
next 12 months.

Our accounts receivable increased from $12.5 million at March 31, 2002 to
$18.1 million at March 31, 2003. The increase was due primarily to a higher
level of billings during the last quarter of fiscal 2003 compared to fiscal
2002. Additionally, AT&T has discontinued billing for their 900 telephone
service, utilized by The Work Number Services business unit. As a result, we
have moved to a third party billing company, whose billing terms are further
extended than AT&T's terms. As a result, we have an additional receivable of
approximately $1.0 million at March 31, 2003 compared to March 31, 2002.

Our capital expenditures were $4.5 million in fiscal 2003. These capital
expenditures were principally for computer equipment and integrating the
operational infrastructure for our unemployment cost management services
segment. At March 31, 2003, we had no material capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and operating leases, but would expect capital expenditures to
increase during the next 18 to 24 months, as we continue to integrate the
operations of our acquisitions.

In November 2000, our board of directors authorized us to repurchase up to
400,000 shares of our stock in the open market, or through privately negotiated
transactions over the following two-year period. In November 2001, this plan was
extended to November 2004, and the number of shares was increased to one
million. Under this plan, we repurchased 311,000 shares during the year ended
March 31, 2003. Cumulative shares repurchased under this plan amount to 608,500.
Share amounts are reported on a pre-dividend basis. On September 5, 2002, our
board of directors approved a new stock repurchase plan, authorizing us to
repurchase up to one million shares during the 36 month period ending September
30, 2005, subject to market conditions and other factors. As of March 31, 2003,
175,000 shares have been repurchased under this plan. Except for the 409,231
shares remaining in the treasury at March 31, 2003, all shares repurchased have
been reissued in connection with employee stock option exercises and employee
stock purchase plan purchases.

During fiscal 2003, we continued our quarterly dividend program, declaring
a $0.03 dividend on each share of our common stock in each of the first three
quarters and a $0.04 dividend in the fourth quarter.

In connection with the acquisitions of The Frick Company and the GM
Unemployment Compensation Business, on March 27, 2002, pursuant to a loan
agreement dated as of March 27, 2002, (the "Loan Agreement"), we obtained
secured financing consisting of a $30,000,000 term loan (the "Term Loan") and a
$10,000,000 revolving credit facility (the "Revolving Credit Facility") from
LaSalle Bank National Association, as administrative agent and lender, and
Southwest Bank of St. Louis, as lender, and any other lenders that may become
party to the Loan Agreement (collectively, the "Lenders"). We used the proceeds
of the Term Loan to pay a portion of the purchase price for the acquisitions;
however, we have not borrowed under the Revolving Credit Facility. We must repay
principal of the Term Loan in quarterly installments, with the final installment
due on February 27, 2005. In addition, principal payments are required out of
excess cash flow. The Revolving Credit Facility also matures on February 27,
2005.

39

The Term Loan and advances under the Revolving Credit Facility bear
interest at rates we select under the terms of the Loan Agreement, including a
base rate or eurodollar rate, plus an applicable margin. Until March 27, 2003,
eurodollar rate loans bore interest at the applicable eurodollar rate plus 2.25%
and base rate loans bore interest at the applicable base rate. Commencing March
28, 2003, the applicable margin for eurodollar rate loans varies from 2.00% to
2.25%, and the applicable margin for base rate loans will remain at 0.00%, in
each case based upon our ratio of total indebtedness to EBITDA (earnings before
interest, taxes, depreciation and amortization). We may make prepayments under
the Term Loan and Revolving Credit Facility without penalty. In addition, if
William W. Canfield ceases serving as our chief executive officer during the
first 24 months after closing, and we do not retain a substitute satisfactory to
the Lenders within 120 days, then we are required to repay all outstanding
loans, including both the Term Loan and Revolving Credit Facility.

The Loan Agreement is secured by pledges of our stock in, and guarantees
of, our subsidiaries and security interests in substantially all of our, and our
subsidiaries' assets.

The Loan Agreement includes certain covenants, including, without
limitation, restrictions on the use of proceeds of the Term Loan and loans made
under the Revolving Credit Facility. The Term Loan was to be used solely to pay
a portion of the purchase price for the acquisitions of the The Frick Company
and the GM Unemployment Compensation Business. The proceeds of loans made under
the Revolving Credit Facility may be used solely for working capital, permitted
capital expenditures, as the source for payment of our obligations with respect
to certain existing letters of credit, to pay the transaction cost of the Loan
Agreement, and to finance certain permitted acquisitions. The Loan Agreement
also requires compliance with certain financial covenants based on our minimum
net worth, minimum EBITDA, our ratio of total indebtedness to EBITDA and our
ratio of EBITDA to fixed charges. The Loan Agreement further requires compliance
with certain operating and other covenants which limit, among other things, the
incurrence of additional indebtedness by us and our subsidiaries, the amount of
capital expenditures to be made by us and our subsidiaries, sales of assets and
mergers and dissolutions, impose restrictions on distributions to shareholders,
change of control of TALX, investments, acquisitions and liens, and which
require compliance, in all material respects, with material laws. The Loan
Agreement generally prohibits the payment of cash dividends, except for cash
dividends not in excess of $2.5 million per fiscal year so long as we are not in
default at the time of the declaration. The Loan Agreement also contains various
representations and warranties, including among other things, the accuracy of
financial statements and other information delivered to the Lenders and the
absence of changes which would have or would reasonably be likely to have a
material adverse effect (as customarily included in secured credit facilities of
this nature).

On January 27, 2003, we entered into an amendment to the Loan Agreement.
Our wholly-owned subsidiaries, James E. Frick, Inc., Garcia Acquisition Sub,
Inc. and Ti3, Inc., consented to the amendment as guarantors. Among other
things, the amendment modified the minimum EBITDA covenant for the fiscal
quarters ending March 31, 2003, June 30, 2003 and September 30, 2003 contained
in the Loan Agreement. In addition, we obtained from the Lenders a waiver of our
violation of the minimum EBITDA covenant for the quarter ended December 31,
2002. At March 31, 2003, we were in compliance with all financial covenants
under the Loan Agreement.

As a condition of our Loan Agreement, we were required to enter into an
interest rate swap agreement for 50% of our outstanding Term Loan as a means of
reducing our interest rate exposure. Pursuant to this requirement, we entered
into an interest rate swap contract on June 26, 2002 for a notional amount of
$14 million, which represented 50% of our outstanding Term Loan balance on that
date. Under this contract, we pay a fixed rate of 3.45% and receive a variable
rate of LIBOR, which is equal to the LIBOR rate utilized on our Term Loan. The
notional amount of our interest rate swap contract steps down according to the
same schedule as our Term Loan, maintaining a 50% hedged position. All payment
dates and maturity dates are the same as our Term Loan. This strategy
effectively converts 50% of our Term Loan into a fixed rate instrument.

The interest rate swap and related gains and losses arising on the contract
are accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative

40

instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed.

As of March 31, 2003, the fair value of the interest rate swap in the
amount of $256,000 is included in accrued expenses and other liabilities.
Interest expense accrued on the swap contract was $175,000 for the year ended
March 31, 2003.

We do not use financial instruments for trading or speculative purposes.

OTHER MATTERS

We are cooperating with a pending SEC investigation and are a defendant in
pending lawsuits which are described in note 17 of our Notes to Consolidated
Financial Statements, which is incorporated by reference herein.

As described above, we have restated our financial statements for each of
the quarters ended June 30, 2001 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, we could become
subject to additional litigation or regulatory proceedings or both. As of the
date hereof, we are not aware of any litigation having been commenced against us
related to this restatement. However, such litigation could be commenced against
us in the future and the plaintiffs who have filed lawsuits against us
previously could amend their complaints to include claims related to this
restatement, and if so, we could not predict the outcome of any such litigation
at this time. Additionally, the lenders under our March 27, 2002 Loan Agreement,
which is described more fully above under Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources, could seek to exercise remedies which may be available to them, such
as acceleration of our loans, in the event they determine that, as a result of
the restatement discussed above or the SEC investigation discussed above or
otherwise, we have breached a covenant or representation and warranty in the
Loan Agreement. If an unfavorable result occurred in any such action, our
business and financial conditions could be harmed.

Further, we cannot predict at this time whether or not any additional
regulatory investigation by the SEC or otherwise related to the restatement or
any other matter will be commenced, or if it is, the outcome of any such
investigation. However, if any such investigation were to result in a regulatory
proceeding or action against us, our business and financial condition could be
harmed.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of this type are expensive and will
require that we devote substantial resources and executive time to defend these
proceedings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As discussed above under Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources, our Term Loan and advances under our Revolving Credit Facility bear
interest at rates we select under the terms of the Loan Agreement, including a
base rate or eurodollar rate, plus an applicable margin. Until March 27, 2003,
eurodollar rate loans bore interest at the applicable eurodollar rate plus 2.25%
and base rate loans bore interest at the applicable base rate. Commencing March
28, 2003 the applicable margin for eurodollar rate loans varies from 2.00% to
2.25%, and the applicable margin for base rate loans remains at 0.00%, in each
case based upon our ratio of total indebtedness to EBITDA.

As of March 31, 2003, we had $22 million principal outstanding on our Term
Loan, of which $11 million was hedged with an interest rate swap contract. On an
annual basis, a 100 basis point change in interest rates would result in an
approximate $110,000 and $150,000 change to our annual interest expense, based
on net variable borrowings of $11 million and $15 million at March 31, 2003 and
2002, respectively.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

42

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of TALX Corporation:

We have audited the accompanying consolidated balance sheets of TALX
Corporation and subsidiaries as of March 31, 2002 and 2003, and the related
consolidated statements of earnings, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
March 31, 2003. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TALX
Corporation and subsidiaries as of March 31, 2002 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 5 to the consolidated financial statements, effective
April 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets and as discussed in Note 20 to the consolidated
financial statements, effective April 1, 2000, the Company changed its method of
accounting for revenue recognition.

/s/ KPMG LLP

St. Louis, Missouri
May 2, 2003

43

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
44

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

See accompanying notes to consolidated financial statements.
45

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2001, 2002 AND 2003

See accompanying notes to consolidated financial statements.
46

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.
47

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2003

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) DESCRIPTION OF BUSINESS

We are the leading provider of automated employment and income verification
and unemployment cost management services and a leader in providing outsourced
employee self-service applications. Our services enable mortgage lenders,
pre-employment screening companies, employers and other authorized users to
obtain employee human resources and payroll information. We also provide
unemployment insurance claims processing and unemployment tax planning and
management to a broad range of employers. Further, we allow employees to review
and modify information in human resources and payroll management information
systems without requiring employer assistance.

Our services and software use interactive web and interactive voice
response software, fax and other technologies and are designed to enhance
service levels, improve productivity and reduce costs by automating historically
labor intensive, paper-based processes and enabling users to perform
self-service transactions. We typically serve large organizations, including
approximately two-thirds of the Fortune 500 and a number of federal, state and
local government agencies.

(b) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of TALX
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

(c) CASH AND CASH EQUIVALENTS

We consider all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.

(d) ALLOWANCE FOR DOUBTFUL ACCOUNTS

We evaluate the collectibility of accounts receivable based on a
combination of factors. In cases where we are aware of circumstances that may
impair a specific customer's ability to meet its financial obligations, we
record a specific allowance against amounts due, and thereby reduce the net
recognized receivable (i.e., net of deferred revenue) to the amount we
reasonably believe will be collected. For the remaining customers, we recognize
allowances for doubtful accounts based on the length of time the aggregate
receivables are outstanding, the current business environment and historical
experience.

(e) PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the
useful life of the asset or lease term.

(f) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Product development costs are charged to operations as incurred. Software
development costs are expensed as incurred until technological feasibility is
achieved, after which they are capitalized on a product-by-product basis.
Amortization of capitalized software development costs is computed using the
straight-line method over the remaining estimated economic life of the product,
which is typically three years. Amortization of capitalized software development
costs starts when the product is available for general release to clients.

48

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(g) GOODWILL AND OTHER INTANGIBLE ASSETS

We have adopted the provisions of the Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" as of
April 1, 2002. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually. SFAS
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.

(h) REVENUE RECOGNITION, WORK IN PROGRESS AND DEFERRED REVENUE

Revenues from The Work Number are recognized in the period that they are
earned, from transaction fees charged to users for verifications of employment
history and income. Additionally, revenue for set up fees, monthly maintenance
and employer conversion fees are recognized on a straight-line basis from the
time the service is available to be used by our clients through the end of the
service period. Revenues from our unemployment cost management services, called
UC eXpress, are recognized in the period that they are earned, evenly over the
life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met. Human resources and benefits
application services revenue is recognized on a straight-line basis from the
time the service is available to be used by our clients through the end of the
service period. Because of seasonal variations of our service offerings, a
greater number of clients have services available to them from October through
December than during any other period during the year. As a result, revenues in
our third fiscal quarter are substantially higher than in the other three
quarters of the year. Historically, over fifty percent of annual revenues in
this revenue line have been recorded in the third quarter. We recognize hardware
and software license revenue upon shipment based on vendor-specific objective
evidence. Revenues for customization services of customer premises systems are
recognized by the contract method of accounting using percentage of completion
for larger, more complex systems and the completed contract method for smaller
systems. Revenue from maintenance contracts is deferred and recognized ratably
over the maintenance period. Deferred revenue represents the unearned portion of
The Work Number setup fees, as well as, Human Resources and Benefits Application
Services, UC eXpress and maintenance fees. Commissions paid are deferred and
expensed over the related service period.

(i) CONCENTRATION OF CREDIT RISK

We sell our services and software in a variety of industries. No client
represented over 10% of revenues in fiscal 2001, 2002 or 2003. We perform
periodic credit evaluations of our clients' financial condition and generally do
not require collateral; however, for our maintenance business we maintain a
security interest in hardware until payment is received. Credit losses from
clients have been within management's expectations, and management believes the
allowance for doubtful accounts adequately provides for any expected losses.

(j) INCOME TAXES

We record income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

49

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(k) FAIR VALUE OF FINANCIAL INSTRUMENTS

We disclose estimated fair values for our financial instruments. A
financial instrument is defined as cash or a contract that both imposes on one
entity a contractual obligation to deliver cash or another financial instrument
to a second entity and conveys to that second entity a contractual right to
receive cash or another financial instrument from the first entity. Our
financial instruments include long-term debt and a revolving line of credit
facility. The carrying value of these commitments approximate fair value due to
their stated interest rates approximating market rates. These estimated fair
value amounts have been determined using available market information or other
appropriate valuation methodologies.

(l) DERIVATIVE FINANCIAL INSTRUMENTS

We use interest rate swap agreements as required under the terms of our
term loan and revolving credit facility (see note 7). Our policy is to manage
interest costs using a mix of fixed and variable rate debt. Using interest rate
swap agreements, we agree to exchange, at specified intervals, the difference
between fixed and variable interest amounts calculated by reference to an
agreed-upon notional principal amount. We do not hold or issue any derivative
financial instruments for trading purposes.

(m) STOCK-BASED COMPENSATION

We have historically accounted for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation."

Since all of our options are granted with an option price equal to the
market price at the time of grant, we have not recognized any stock-based
employee compensation cost under our stock option plans. SFAS No. 123 requires
pro forma disclosure of the impact on earnings as if the compensation expense
for these plans had been determined using the fair value method. Compensation
cost is calculated under a straight line basis. The following table presents our
net earnings and earnings per share as reported and the pro forma amounts that
would have been reported using the fair value method under SFAS 123 for the
years presented:

50

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The full impact of calculating compensation cost for stock options under
SFAS No. 123 was not reflected in the determination of the impact, because
compensation cost is reflected over the options' vesting period of six to ten
years and compensation cost for options granted prior to April 1, 1995 is not
considered. The fair value of option grants for fiscal 2001, 2002 and 2003 is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: expected volatility of 62%, 59%
and 80% in fiscal 2001, 2002 and 2003, respectively; risk-free interest rate of
4.91%, 4.81% and 3.50% in fiscal 2001, 2002 and 2003, respectively; expected
life of 5.0, 5.0 and 7.5 years in fiscal 2001, 2002 and 2003, respectively; and
an expected dividend yield of 3.50%, 3.50% and 1.20% in fiscal 2001, 2002 and
2003, respectively.

(n) MANAGEMENT'S USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates.

(o) LITIGATION

We have legal contingencies that have a high degree of uncertainty. As
described in Note 17, certain allegations have been made against us. We believe
that liabilities for many of these matters are either not probable or not
estimable and therefore, no reserves have been established for those matters.
When a contingency becomes probable and estimable a reserve is established. We
have established reserves for certain other matters. If these matters are
resolved unfavorably, they could have a significant impact on our future results
and liquidity. Legal costs are expensed as incurred.

(p) EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflects
the incremental increase in common shares outstanding assuming the exercise of
all employee stock options and warrants that would have had a dilutive effect on
earnings per share. The weighted average number of shares is based on common
stock outstanding for basic earnings per share and common stock outstanding and
common stock options and warrants for diluted earnings per share in periods when
such common stock options and warrants are not antidilutive. All weighted
average share amounts include the effect of all stock dividends and splits.

(q) RECLASSIFICATIONS

Certain balances in prior fiscal years have been reclassified to conform to
the presentation adopted in the current fiscal year.

51

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

Billings to customers are made in accordance with the terms of the
individual contracts.

The following table represents activity within our allowance for doubtful
accounts for the years ended March 31, 2001, 2002 and 2003:

(3) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

52

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Product development costs and amortization of capitalized software
development costs for the years ended March 31, 2001, 2002 and 2003 were as
follows:

(5) GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with the acquisitions of Ti3, Inc.; the unemployment cost
management services business of Gates, McDonald & Company, a subsidiary of
Nationwide Mutual Insurance Company; and James E. Frick, Inc., d/b/a The Frick
Company, TALX acquired certain identifiable intangible assets. These assets were
recorded in accordance with the Financial Accounting Standards Board SFAS No.
141, "Business Combinations."

Effective April 1, 2002, we have adopted the Financial Accounting Standards
Board SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. Under the provisions of SFAS No.
142, any impairment loss identified upon adoption of this standard will be
recognized as a cumulative effect of a change in accounting principle. Goodwill
and intangible assets determined to have an indefinite useful life that are
acquired in purchase business combinations will not be amortized, but instead
tested for impairment on an annual basis. Through the use of an independent
business appraiser, we reviewed our goodwill and intangible assets as of
December 31, 2002 and determined that no impairment existed.

The following table summarizes goodwill and other intangible asset activity
for years ended March 31, 2002 and 2003 (dollars in thousands).

53

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization of other intangible assets is projected to be $1.4 million for
the fiscal year ended March 31, 2004 and $1.3 million for each of the fiscal
years ended March 31, 2005 through 2008.

(6) ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities for the years ended March 31, 2002
and 2003 consist of the following:

(7) LONG-TERM DEBT

Long-term debt at March 31, 2002 and 2003 consisted of:

In connection with the acquisitions of The Frick Company and the GM
Unemployment Compensation Business, on March 27, 2002, pursuant to a loan
agreement dated as of March 27, 2002, (the "Loan Agreement"), we obtained
secured financing consisting of a $30,000,000 term loan (the "Term Loan") and a
$10,000,000 revolving credit facility (the "Revolving Credit Facility") from
LaSalle Bank National Association, as administrative agent and lender, and
Southwest Bank of St. Louis, as lender, and any other lenders that may become
party to the Loan Agreement (collectively, the "Lenders"). We used the proceeds
of the Term Loan to pay a portion of the purchase price for the acquisitions;
however, we have not borrowed under the Revolving Credit Facility. We must repay
principal of the Term Loan in quarterly installments, with the

54

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

final installment due on February 27, 2005. In addition, principal payments are
required out of excess cash flow. The Revolving Credit Facility also matures on
February 27, 2005.

The Term Loan and advances under the Revolving Credit Facility bear
interest at rates we select under the terms of the Loan Agreement, including a
base rate or eurodollar rate, plus an applicable margin. Until March 27, 2003,
eurodollar rate loans bore interest at the applicable eurodollar rate plus 2.25%
and base rate loans bore interest at the applicable base rate plus 0.00%.
Commencing March 28, 2003, the applicable margin for eurodollar rate loans
varies from 2.00% to 2.25%, and the applicable margin for base rate loans
remains at 0.00%, in each case based upon our ratio of total indebtedness to
EBITDA. We may make prepayments under the Term Loan and Revolving Credit
Facility without penalty. In addition, if William W. Canfield ceases serving as
our chief executive officer during the first 24 months after closing, and we do
not retain a substitute satisfactory to the Lenders within 120 days, then we are
required to repay all outstanding loans (Term Loan and Revolving Credit
Facility).

The Loan Agreement is secured by security interests in substantially all
the assets of us and of our three subsidiaries (Ti3, Garcia and Frick), the
guarantees of our three subsidiaries, and a pledge of the stock of each of those
subsidiaries.

The Loan Agreement includes certain covenants, including, without
limitation, restrictions on the use of proceeds of the Term Loan and loans made
under the Revolving Credit Facility. The Term Loan was to be used solely to pay
a portion of the purchase price for the acquisitions of the The Frick Company
and the GM Unemployment Compensation Business. The proceeds of loans made under
the Revolving Credit Facility may be used solely for working capital, permitted
capital expenditures, as the source for payment of our obligations with respect
to certain existing letters of credit, to pay the transaction cost of the Loan
Agreement, and to finance certain permitted acquisitions. The Loan Agreement
also requires compliance with certain financial covenants based on our minimum
net worth, minimum EBITDA, our ratio of total indebtedness to EBITDA and our
ratio of EBITDA to fixed charges. The Loan Agreement further requires compliance
with certain operating and other covenants which limit, among other things, the
incurrence of additional indebtedness by us and our subsidiaries, the amount of
capital expenditures to be made by us and our subsidiaries, sales of assets and
mergers and dissolutions, impose restrictions on distributions to shareholders,
change of control of TALX, investments, acquisitions and liens, and which
require compliance, in all material respects, with material laws. The Loan
Agreement generally prohibits the payment of cash dividends, except for cash
dividends not in excess of $2.5 million per fiscal year so long as we are not in
default at the time of the declaration. The Loan Agreement also contains various
representations and warranties, including among other things, the accuracy of
financial statements and other information delivered to the Lenders, the absence
of changes which would have or would reasonably be likely to have a material
adverse effect (as customarily included in secured credit facilities of this
nature).

On January 27, 2003, we entered into an amendment to the Loan Agreement.
Our wholly-owned subsidiaries, James E. Frick, Inc., Garcia Acquisition Sub,
Inc. and Ti3, Inc., consented to the amendment as guarantors. Among other
things, the amendment modified the minimum EBITDA covenant for the fiscal
quarters ending March 31, 2003, June 30, 2003 and September 30, 2003 contained
in the Loan Agreement. In addition, we obtained from the Lenders a waiver of our
violation of the minimum EBITDA covenant for the quarter ended December 31,
2002. At March 31, 2003, we believe we were in material compliance with all
financial covenants under the Loan Agreement.

At March 31, 2003 our outstanding borrowings carried an interest rate of
3.54%.

Scheduled minimum long-term debt repayments are $10 million and $12 million
in fiscal years 2004 and 2005, respectively. Payments are due in equal quarterly
amounts. We may accelerate credit facility repayments, depending on available
operating cash flow.

55

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) DERIVATIVE FINANCIAL INSTRUMENT

On March 27, 2002, we entered into the Term Loan which accrues interest
based upon certain LIBOR indexes and will amortize over three years with a
maturity of February 27, 2005. As a condition of the Term Loan Agreement, we
were required to enter into a hedge contract for 50% of our outstanding term
loan as a means of reducing our interest rate exposure. Pursuant to this
requirement, we entered into an interest rate swap contract on June 26, 2002 for
a notional amount of $14 million, which represented 50% of our outstanding term
loan balance on that date. Under this contract, we pay a fixed rate of 3.45% and
receive a variable rate of LIBOR, which is equal to the LIBOR rate utilized on
our term loan. The notional amount of our interest rate swap contract steps down
according to the same schedule as our term loan, maintaining a 50% hedged
position. All payment dates and maturity dates are the same as our term loan.
This strategy effectively converts 50% of our term loan into a fixed rate
instrument.

The interest rate swap and related gains and losses arising on the contract
are accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative
instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed.

As of March 31, 2003, the fair value of the interest rate swap in the
amount of $256,000 is included in accrued expenses and other liabilities.
Interest expense accrued on the swap contract was $175,000 for the year ended
March 31, 2003.

We do not use financial instruments for trading or speculative purposes.

(9) LEASES

We have non-cancelable operating leases, primarily for office space and
office equipment, that expire through fiscal 2009. Total rent expense for
operating leases was $1,360,000, $1,494,000 and $5,021,000 in 2001, 2002 and
2003, respectively.

Amortization expense associated with assets acquired under capital leases
is included in total depreciation and amortization expense.

56

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a schedule, by year, of the future minimum payments under
capital and operating leases, together with the present value of the net minimum
payments as of March 31, 2003.

(10) INCOME TAXES

Income tax expense consists of the following:

57

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense differed from the amounts computed by applying the
federal income tax rate of 35% to earnings from continuing operations before
income tax expense as a result of the following:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
2002 and 2003 are presented below:

A net operating loss carryforward of approximately $600,000 is available to
offset consolidated future taxable earnings, subject to certain restrictions.
This net operating loss carryforward was acquired as part of our 2002
acquisitions.

In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the

58

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences.

(11) RESTRUCTURING AND OTHER CHARGE

During the quarter ended September 30, 2001, we reorganized our sales and
delivery operations and refocused our product lines related to our human
resources and benefit applications and customer premises systems businesses. In
conjunction with the reorganization, we reduced our workforce by approximately
17%, closed certain regional sales offices and wrote-down hardware inventory and
capitalized software. As a result of these actions, we incurred restructuring
charges of $1.9 million associated with the write-off of capitalized software,
$349,000 related to employee severance costs and $337,000 related to office
closing costs. These items are reflected in the line item "restructuring charge"
on the statement of earnings and $240,000 and $139,000 is reflected in accrued
expenses on the balance sheet as of March 31, 2002 and 2003, respectively.
Additionally, we incurred a charge of $307,000 related to the write-down of
certain hardware inventory items. This charge is reflected as a separate
component of cost of goods sold on the statement of earnings for the year ended
March 31, 2002.

(12) SHAREHOLDERS' EQUITY

TALX has adopted a stock option plan for employees that provides for the
issuance of a maximum of 3,049,200 shares of common stock pursuant to incentive
or non-qualified options. Options are granted by the Board of Directors at
prices not less than fair market value as of the date of the grant. Options vest
20% per year and expire six to ten years after the date of the grant.

TALX has adopted a stock option plan for outside directors that provides
for the issuance of a maximum of 145,200 shares of common stock. Options are
granted in the amount of 2,500 shares each to outside directors at prices not
less than fair market value as of the date of the grant, which is April 1 of
each year. The options vest one year from the date of grant. Options outstanding
amount to 54,568 and 53,676 at March 31, 2002 and 2003, respectively.

59

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Activity under the plans for the three years ended March 31, 2003 is as
follows:

In May 1999, we entered into an agreement with a third party, under which
they provide us with strategic advisory services, including in connection with
our acquisition of Ti3. Pursuant to that agreement, we issued them warrants to
purchase a total of 45,375 shares of our common stock at an exercise price of
$4.82 per share. All 45,375 warrants are outstanding and exercisable at March
31, 2003.

During fiscal 1997, shareholders approved the TALX Corporation 1996
Employee Stock Purchase Plan (ESPP), which was amended in 1998 and 2000 and
amended and restated in 2001. The ESPP allows eligible employees the right to
purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. Of the
907,500 shares of common stock shares reserved for the ESPP, there were 464,106
shares remaining at March 31, 2003.

60

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In November 2000, our board of directors authorized us to repurchase up to
400,000 shares of our stock in the open market, or through privately negotiated
transactions over the following two-year period. In November 2001, this plan was
extended to November 2004, and the number of shares was increased to one
million. Under this plan, we repurchased 311,000 shares during the year ended
March 31, 2003. Cumulative shares repurchased under this plan amount to 608,500.
Share amounts are reported on a pre-dividend basis. On September 5, 2002, our
board of directors approved a new stock repurchase plan, authorizing us to
repurchase up to one million shares during the 36 month period ending September
30, 2005, subject to market conditions and other factors. As of March 31, 2003,
175,000 shares have been repurchased under this plan. Except for the 409,231
shares remaining in the treasury at March 31, 2003, all shares repurchased have
been reissued in connection with employee stock option exercises and employee
stock purchase plan purchases.

During fiscal 2001, we began paying dividends on our common stock on a
quarterly basis. Dividends of $0.08, $0.12 and $0.13 per share were declared and
dividends of $0.05, $0.12 and $0.12 per share were paid to shareholders during
fiscal years 2001, 2002 and 2003, respectively. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend
upon our earnings, capital requirements and operating and financial condition
and such other factors as the board may deem relevant.

(13) BUSINESS SEGMENTS

FASB Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," requires companies to provide certain information about
their operating segments. Prior to our acquisitions in March 2002, we only had
one reportable segment. Effective March 27, 2003, we had two reportable
segments: Payroll-Based Services and Software and Unemployment Cost Management
Services.

Payroll-Based Services and Software: This segment includes the following:

- The Work Number Services -- The Work Number(R), W-2 eXpress(SM), ePayroll
and FasTime(R);

- Human Resources and Benefits Application Services; and

- Customer Premises Systems and Related Maintenance and Support

Unemployment Cost Management Services: This segment includes our UC
eXpress(SM) services suite.

For the year ended March 31, 2002, we allocated goodwill and intangible
assets to the appropriate segments. All interest income and expense, debt and
executive overhead expenses were included in the Payroll-Based Services and
Software segment.

For the year ended March 31, 2003, the following items are not reported on
an operating segment basis (and are included in the following table in the
column entitled "Unallocated") because they are not considered in the
performance evaluation by our chief operating decision-maker, our chairman and
CEO:

- Interest income and expense and income taxes;

- Acquisition-related debt, goodwill and intangible assets;

- Intangible asset amortization expense; and

- Executive overhead expenses

61

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Summarized financial information concerning our reportable operating
segments are shown in the following table for the periods indicated:

(14) DISCONTINUED OPERATIONS

Effective March 31, 2000, we sold all of the assets, net of liabilities, of
the database services business to WPZ Holdings, Inc., the parent company of one
of the division's largest customers. The sales price was $1,273,000, which
represented the current book value of the net assets sold. We realized pre-tax
and after-tax gains of $187,000 and $117,000, respectively. While the effective
date of the transaction was March 31, 2000, cash settlement occurred April 5,
2000.

During the quarter ended September 30, 2000, we concluded all
transition-related activity for the database services business. Completing this
transition ahead of schedule resulted in a savings of $61,000 of the transition
reserve. Therefore, we realized pre-tax and after-tax gains of $61,000 and
$37,000, respectively.

The results of operations for the database business for the year ended
March 31, 2001 included a gain on disposal of $61,000, income taxes of $24,000
and net earnings of $36,000. There were no results of operations for the years
ended March 31, 2002 and 2003. As of March 31, 2001, 2002 and 2003 there were no
assets or liabilities related to the database business on the balance sheets.

(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for our cash and cash equivalents, short-term
investments, trade receivables, accounts payable, accrued expenses and income
taxes payable approximate fair value because of the short-term maturity of these
instruments. The carrying value of long-term debt and borrowings under our
revolving line of credit facility approximate fair value due to their stated
interest rates approximating market rates.

62

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

These estimated fair value amounts have been determined using available market
information or other appropriate valuation methodologies.

(16) EMPLOYEE BENEFIT PLAN

We sponsor a profit-sharing/401(k) plan. The plan covers substantially all
of our employees. We make contributions to the plan, subject to ERISA
limitations, up to 2.4% of employees' earnings. Total expense under the plan for
the years ended March 31, 2001, 2002 and 2003 was $305,000, $322,000 and
$762,000, respectively.

(17) COMMITMENTS AND CONTINGENCIES

We are a defendant from time to time in lawsuits. Except to the extent
described below, based on information currently available, we believe that no
current proceedings, individually or in the aggregate, will have a material
adverse effect upon us.

On December 26, 2001, a purported class action lawsuit was filed in the
United States District Court for the Eastern District of Missouri (Civil Action
No. 4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company,
against the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in the Company's August 2001 secondary common stock
offering ("Secondary Offering"). The case purportedly is brought on behalf of
all persons who purchased or otherwise acquired shares of our common stock
between July 18, 2001 and October 1, 2001 ("Putative Class Period"), including
as part of the Secondary Offering. The complaint alleges, among other things,
that certain statements in the registration statement and prospectus for the
Secondary Offering, as well as other statements made by the Company and/or the
Individual Defendants during the Putative Class Period, were materially false
and misleading because they allegedly did not properly account for certain
software and inventory, did not reflect certain write-offs, and did not
accurately disclose certain business prospects. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against the Company and the Individual Defendants,
violations of Section 11 of the Securities Act of 1933 against the Company, the
Individual Defendants and the underwriters, and violation of Section 15 of the
Securities Act of 1933 against Mr. Canfield.

Three additional purported class action lawsuits were filed in the same
court, against the same defendants and making substantially the same
allegations: on January 8, 2002 by Donald Metzger (Civil Action No.
4:02CV00031DJS); on January 9, 2002 by Anna Goodman (Civil Action No.
4:02CV00033DJS); and on January 30, 2002 by Al Hinton (Civil Action No.
4:02CV00168DJS) each of whom allegedly were shareholders of the Company during
the Putative Class Period. On February 15, 2002, these three lawsuits were
consolidated with and into the Brody lawsuit (Civil Action No. 4:01CV02014DJS)
for all purposes. In October 2002, the case was transferred from the Honorable
Donald J. Stohr, United States District Judge, to the Honorable Henry E. Audrey,
United States District Judge.

The consolidated lawsuit seeks, among other things, an award of unspecified
money damages, including interest, for all losses and injuries allegedly
suffered by the putative class members as a result of the defendants' alleged
conduct and unspecified equitable/injunctive relief as the Court deems proper.

On May 20, 2002, the Company and the Individual Defendants filed a motion
to dismiss the lawsuits, and the underwriter defendants filed a separate motion
to dismiss. On March 31, 2003, the Court granted defendants' motion in part,
dismissing plaintiffs' claims under Section 10(b) of the Exchange Act and Rule
10b-5 thereunder, without prejudice. The Court granted plaintiffs sixty
additional days to file an

63

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amended consolidated complaint, and defendants sixty days thereafter to respond
to the amended complaint. No amended complaint has been filed to date.

We believe the plaintiffs' claims are without merit and intend to defend
vigorously against them. However, due to the inherent uncertainties of
litigation, we cannot accurately predict the ultimate outcome of the litigation.
An unfavorable outcome could have a material adverse impact on our business,
financial condition and results of operations.

As previously disclosed, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. On November 12, 2002,
the staff of the Central Regional Office of the Commission sent us a "Wells
letter" indicating the staff's plans to recommend to the Commission that it
institute an enforcement action against us and two of our executive officers,
William Canfield and Craig Cohen, related to two matters, and requesting that we
and such executive officers submit responses to the letter. The Wells letter
states that the SEC staff will allege, among other things, that our financial
statements were misleading as a result of capitalizing instead of expensing $1.6
million related to a patent technology license agreement executed in March 2001
and expensing approximately $158,000 in bonus payments to executive officers in
the first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001.
Those items are among those that are the subject of the restatement as disclosed
on our Form 10-K/A for the year ended March 31, 2002. The remedies the
Commission may consider include an injunction against us and the individuals
and, if appropriate, an officer and director bar and disgorgement and civil
money penalties against the individuals. The Company and the individuals have
filed separate written responses to the Wells letter setting forth the reasons
why the proposed enforcement action should not be instituted by the Commission.

As described above, we have filed restated financial statements for each of
the quarters ended June 30, 2000 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, we could become
subject to additional litigation or regulatory proceedings or both. As of the
date hereof, we are not aware of any litigation having been commenced against us
related to this restatement. However, such litigation could be commenced against
us in the future and the plaintiffs who have filed lawsuits against us
previously could amend their complaints to include claims related to this
restatement, and if so, we could not predict the outcome of any such litigation
at this time. Additionally, the lenders under our March 27, 2002 Loan Agreement,
which is described more fully below under Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources, could seek to exercise remedies which may be available to them, such
as acceleration of our loan, in the event they determine that, as a result of
the restatement discussed above or the SEC investigation discussed below, we
have breached a covenant or representation and warranty in the Loan Agreement.
If an unfavorable result occurred in any such action, our business and financial
conditions could be harmed.

As of the date hereof, the SEC is investigating our accounting for certain
items, including those which were the subject of the restatement. At this time,
we cannot predict whether or not any additional regulatory investigation related
to this restatement or any other matter will be commenced, or if it is, the
outcome of any such investigation. However, if any such investigation were to
result in a regulatory proceeding or action against us, our business and
financial condition could be harmed.

Additionally, we are required to indemnify each of the Individual
Defendants, as officers and/or directors of the Company, in connection with the
above matters, provided they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the Company. Stifel,
Nicolaus & Company and A.G. Edwards & Sons, Inc. have made demands on the
Company to indemnify them in connection with these matters.

Our directors and officers liability insurance carriers have received
notice of the consolidated litigation and SEC investigation.

64

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of this type are expensive and will
require that we devote substantial resources and executive time to defend these
proceedings.

(18) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for interest totaled $0, $0 and $1.3 million for
the years ended March 31, 2001, 2002 and 2003, respectively. Cash paid during
the year for income taxes totaled $2.7 million, $1.0 million and $2.5 million
for the years ended March 31, 2001, 2002 and 2003, respectively.

(19) RELATED PARTY TRANSACTION

James W. Canfield, the son of our Chairman, President and Chief Executive
Officer, is employed in a non-executive position with our Company as the manager
of ePayroll business development. Mr. Canfield has a current annual salary of
$95,000 and is eligible for a bonus of approximately $19,000 based upon certain
performance goals. This bonus can decrease or increase based on the percentage
achievement of these performance goals. Mr. Canfield is also eligible annually
for an award of 2,500 stock options. Both the bonus and stock option awards are
granted under standard corporate compensation plans and are consistent with
payments made to managers at Mr. Canfield's level. For fiscal 2003, Mr. Canfield
received $91,350 in salary, $12,800 in bonus, and 2,500 stock options for his
services to the Company.

(20) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

During 2001, we changed our method of accounting for certain service
transactions in the Human Resources and Benefits Application Services and The
Work Number Services revenue lines to be in accordance with Staff Accounting
Bulletin (SAB) No. 101. We also considered recent guidance from the SEC staff
concerning the accounting for these types of service transactions. This guidance
requires revenues to be recognized on a straight-line basis from the time the
service is available for use by our clients through the end of the service
period. Previously, we had consistently recorded revenues as services were
provided. We have retroactively adopted SAB 101 as of April 1, 2000, and have
recorded a cumulative effect adjustment of $1.7 million, net of tax of $1.1
million, in fiscal 2001 to reflect the application of the new accounting. The
cumulative effect adjustment was computed based on revenue of $2.9 million, and
related commission expense of $175,000, initially recognized in 2000 and prior
years that was delayed to 2001 and future periods under SAB 101.

(21) SUBSEQUENT EVENT

On April 22, 2003 we sold substantially all of the assets of our human
resources and benefits application services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone.

The transaction is structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2 million and $6 million, with no minimum guaranteed amount. We
will record cash received under the asset purchase agreement first to reduce the
recorded value of net assets sold under the agreement and then to reflect gain
on the sale of the business. In connection with the sale, we will provide
Workscape, Inc., for agreed upon fees, with various transition services related
to the operation of the benefits enrollment business until December 31, 2005, or
until certain transferred client contracts have expired or been terminated.
Workscape, Inc. has hired all of the employees related to the benefits
enrollment business.

65

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and executive officers of the Company is
contained under the caption "Nominees and Continuing Directors," "Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" included
in the Proxy Statement for the 2003 Annual Meeting of Shareholders, which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is contained under the caption
"Executive Compensation," "Compensation Committee Interlocks and Insider
Participation," "Equity Compensation Plan Information," "Shareholder Approved
Equity Compensation," "Non-Shareholder Approved Equity Compensation,"
"Employment Agreements" and "Director Compensation" included in the Proxy
Statement for the 2003 Annual Meeting of Shareholders, which is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and
management and related stockholder matters is contained under the captions
"Shareholder Approved Equity Compensation," "Non-shareholder Approved Equity
Compensation," "Common Stock Ownership of Directors, Nominees, and Officers,"
"Common Stock Ownership of Certain Beneficial Owners," and "Equity Compensation
Plan Information" included in the Proxy Statement for the 2003 Annual Meeting of
Shareholders, which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
contained under the caption "Certain Relationships and Related Party
Transactions" included in the Proxy Statement for the 2003 Annual Meeting of
Shareholders, which is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, management,
including our Chairman, President and Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures with respect to the information generated
for use in this Annual Report. Based upon, and as of the date of that
evaluation, the Chairman, President and Chief Executive Officer and the Chief
Financial Officer concluded that the disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.

There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation. There were no significant deficiencies or
material weaknesses identified in the evaluation and therefore, no corrective
actions were taken.

It should be noted that while our management, including the Chairman,
President and Chief Executive Officer and the Chief Financial Officer, believe
our disclosure controls and procedures provide a reasonable level of assurance,
they do not expect that our disclosure controls and procedures or internal
controls will

66

prevent all error and all fraud. A control system, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements

See Item 8 -- Index to Consolidated Financial Statements

(2) Financial Statement Schedules

None; such schedules have been omitted because of the absence of
conditions under which they are required or because the
information is included in the financial statements or notes
thereto.

(3) Exhibits

See Exhibit Index for the exhibits filed as part of or
incorporated by reference into this report.

We agree to furnish to the Securities and Exchange Commission a
copy of any long-term debt instruments for which the total amount of
securities authorized thereunder does not exceed 10% of the total
assets of us and our subsidiaries on a consolidated basis.

(b) Reports on Form 8-K

Current Report on Form 8-K filed by the Company on January 31, 2003,
furnishing a press release issued by the Company to announce third quarter
results.

67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

TALX CORPORATION

By: /s/ WILLIAM W. CANFIELD
------------------------------------
Chairman, President and Chief
Executive
Officer (Principal Executive
Officer)

May 22, 2003

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:

/s/ WILLIAM W. CANFIELD Chairman, President, Chief Executive May 22, 2003
- -------------------------------------- Officer and Director (Principal
William W. Canfield Executive Officer)

/s/ L. KEITH GRAVES Chief Financial Officer (Principal May 22, 2003
- -------------------------------------- Financial Officer and Principal
L. Keith Graves Accounting Officer)

/s/ RICHARD F. FORD Director May 22, 2003
- --------------------------------------
Richard F. Ford

/s/ TONY G. HOLCOMBE Director May 22, 2003
- --------------------------------------
Tony G. Holcombe

/s/ CRAIG E. LABARGE Director May 22, 2003
- --------------------------------------
Craig E. LaBarge

/s/ EUGENE M. TOOMBS Director May 22, 2003
- --------------------------------------
Eugene M. Toombs

/s/ M. STEVE YOAKUM Director May 22, 2003
- --------------------------------------
M. Steve Yoakum

68

CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER

I, William W. Canfield, certify that:

1. I have reviewed this annual report on Form 10-K of TALX Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

By: /s/ WILLIAM W. CANFIELD
------------------------------------
William W. Canfield
Chairman, President and Chief
Executive Officer
TALX Corporation

May 22, 2003

69

CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER

I, L. Keith Graves, certify that:

1. I have reviewed this annual report on Form 10-K of TALX Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were any significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

By: /s/ L. KEITH GRAVES
------------------------------------
L. Keith Graves
Chief Financial Officer
TALX Corporation

May 22, 2003

70

EXHIBIT INDEX

- ---------------

+ TALX Corporation undertakes to furnish supplementally a copy of any schedule
to the Securities Exchange Commission upon request.

++ Represents management contract or compensatory plan or arrangement.

* Certain portions of this agreement have been omitted pursuant to a
confidential treatment request and filed separately with the Securities and
Exchange Commission.